While “classic” theory holds that currency intervention is always inefficient, a new school of thought holds that it’s in fact very useful for developing countries. The reason, as Dani Rodrik explains, is that domestic exporters engage in “cost discovery” — holding down your currency gives your domestic companies the chance to find out what they’re best at, which is good for long-term economic strength.
But Japan is manifestly not a developing country. And Japanese companies have by now had plenty of time to find out what they’re good at. So at this point, an artificially weakened currency serves mainly to boost employment in Japan’s export industries at the expense of (a) efficiency (what is Sanyo’s core competency again?), (b) Japanese consumers, and (c) industries that serve the Japanese market.
Fine, you may say, that’s a fair trade. After all, employment gets a boost. But does it? Employment levels are different from employment volatility, and exports are notoriously volatile (because terms of trade can change quickly). Even if a weak yen increases Japanese employment — which is far from obvious — it may actually make Japanese jobs less secure. A global downturn, or a rapid increase in terms of trade — both of which we are seeing now in Japan — can force companies to either default on their debts or fire workers. In the 90s, Japanese companies did the former; they are now doing the latter.
In other words, this is a pretty clear example where Japan’s reflexive (and politically motivated) adherence to “developing country policies” has probably backfired. Just another way that reforming the country’s sclerotic political system could yield real benefits for the economy and people of Japan.
— Noah Smith