Paper short abstract:

We hypothesize that public pressure motivates governments to devalue a currency. We use structural topic models to quantitatively analyze daily Japanese news articles, and employ a supervised machine learning approach to predict foreign exchange market intervention by the Japanese central bank.

Paper long abstract:

When and why does the Japanese government intervene in the currency market? Like other countries in East Asia, the Japanese Ministry of Finance frequently tries to influence exchange rates, ostensibly to limit excess volatility, but in practice usually to depreciate the currency. Technically, this implies selling the Yen and buying a reserve currency such as the USD, accumulating foreign reserves in the process. The decision to intervene is highly political: depreciating a currency helps exporters but hurts importers, and benefits those with investment abroad at the expense of those with savings at home. Yet little is known about what influences the decision to intervene beyond the relative level of the Japanese yen: decision-making is opaque and lobbying, if it takes place, is largely unobservable.

In this paper, we use the public discussion of exchange rate and competitiveness-related topics in the major Japanese financial newspaper (the Nihon Keizai Shimbun) to predict forex intervention. We employ a structural topic model (STM) to quantitatively process the content several hundred thousand news articles, and use a supervised machine learning approach to develop and estimate a model of the probability of an intervention. We find strong evidence that public pressure to intervene precedes action, suggesting that organized economic interest groups are the primary beneficiaries and the likely supporters of foreign exchange intervention.

Paper short abstract:

Since 2012 central banks have introduced negative interest rates. This paper analyzes negative side effects including the risks to financial stability, distributional effects and global imbalances. We discuss ideas such as higher inflation goals and assess the concept of independent central banks.

Paper long abstract:

During the global financial crisis, major central banks have cut their interest rates rates to around zero which was usually regarded as the lower bound. In the following, additional monetary easing was implemented including forward guidance and asset purchase programs. This policy mix resulted in a considerable drop in nominal and real policy rates. However, central bank policies had not the desired effects. Since 2012, some central banks ignored the zero lower bound and dropped interest rates into negative territory, including the European Central Bank, the Swiss National Bank, the Danmarks Nationalbank, the Swedish Riksbank and the Bank of Japan. The central incentive for the implementation of a new monetary policy framework was the requirement to stabilize inflation expectations and to boost output growth.

Analyzing negative interest rates (NIR) at all those central banks, this paper is looking at the following questions: (A) How did central banks implement NIR? (B) What are the differences of NIR between Japan and central banks in Europe? (C) What are the benefits and costs of NIR? This paper discusses some negative side effects of NIR including weakening bank profitability and destabilization of financial stability, distributional effects and outside effects such as currency depreciation. We provide some prospects for central banks discussing potential new ideas such as higher inflation targets and helicopter money. In addition, implementing negative interest rates means that we have to re-assess the concept of independent central banks as these policies do not necessarily follow the will of the general public or elected politicians. In sum, NIR have a place in the arsenal of central banks, but - given their negative domestic and global implications - the benefits of these policies seem to be outweighed by uncertainties and risks.

Key words: Negative nominal interest rate, Monetary policy, Quantitative easing, Bank of Japan, European Central Bank, Central bank independence

Paper short abstract:

For 15 years the Bank of Japan has been consistently failing in its attempts to re-inflate the economy. The failure originates from the misunderstanding the nature of inflation and the original reasons of deflation. Only coordination of structural and monetary policy may succeed.

Paper long abstract:

Since the beginning of the century the Bank of Japan has been consistently failing to achieve its inflation target simply by printing money. I argue that it happens because the BoJ has ignored the nature of inflation itself. In Cagan (1956) framework the price level today is a function of a today's money supply and public expectations of what will be the price level in a future. It is hard to expect that, after having lived for more than two decades with zero and negative inflation rates, the Japanese public will change its expectations on inflation easily. In addition to the expectations, already in 1960, Samuelson and Solow distinguished between demand-pulled and cost-pushed inflation; yet another concept seemingly ignored by the proponents of printing money. Second, some of the Abenomics fiscal and social policies have been contradicting the re-inflating attempts by the Bank of Japan. Here especially switching the burden of country's fiscal spending from big companies to individual consumers with virtually no trickling-down effects has worked effectively towards reducing domestic demand. Third, there has been no attempt of thorough discussion about the factors that triggered deflation in first place. Has it began because of the consumption tax? Ageing society and collapse of the pension system? Collapse of the traditional employment system? Putting the end to deflation is impossible without answering these questions.

As for the title question. It is not economic theory to blame, it is rather politicians who prefer listening to the intellectually easiest advice. The conclusion applies not only to the BoJ and the current Japanese political establishment but unfortunately also to its European and, to some extent, also American counterparts.

Paper short abstract:

Historically, currency reform is best enacted hot on the heels of regime change. In both Germany and Japan, however, hundreds of millions of U.S. dollars were exchanged by military authorities for dubious paper currencies issued by the defeated enemies, and by other occupying powers.

Paper long abstract:

The continued use and circulation of Nazi, Imperial Japanese, and assorted Allied military currencies, and the redemption of these currencies in U.S. dollars, were the source of a huge financial threat to U.S. military authorities in Germany and Japan. Historically, currency reform is best enacted hot on the heels of regime change. In both Germany and Japan, however, hundreds of millions of U.S. dollars were exchanged by military authorities for dubious paper currencies issued by the defeated enemies, and by other occupying powers (principally the Soviet Union in Germany). The scale of these exchange transactions was such that the U.S. Treasury Department made dire warning of financial dysfunction and insolvency at the very highest levels of military command. Against this background, what were the currency and monetary policies of the Allied occupational forces in Germany and Japan? Which individuals or institutions benefited most from these policies? And how did U.S. currency policy proceed given the wider frameworks of quadripartite and Far Eastern Council oversight and requisite negotiations? In order to answer these questions, my presentation at the forthcoming EAJS aims to shed some light on the "shoddy history" (in Charles Kindleberger's words) of how U.S. military authorities managed to "squeeze" U.S. dollars back from Allied occupation personnel "without loss" to the U.S. Government, and ultimately, to present new insights into how the introduction of new currency systems helped reinforce America's position in Germany and Japan during periods of great economic instability and the emerging cold war.