BOJ as Mrs. Watanabe

Today, everybody is talking about BOJ's policy. As I noted yesterday, it should result in vain to bear any fruit in reviving Japan's ailing economy. Politicians touted it as "decisive", but what matters to BOJ is how decisive it looks. The more decisive it looks and the more people talk about it, the more pressure BOJ hopes politicians feel to act, thus evading further criticism from politicians including whether BOJ should play a sole role as a monetary policy steward. It doesn't matter whether it actually works or not.

We also have to notice that BOJ's main target this time is not bond markets or even banks. They are focusing on the currency markets. BOJ has already abandoned any efforts to influence bank lending through bond markets. There has been no monetary policy in Japan since the dawn of this century.

Japan intervened in the currency markets to lower Yen last month. It looks like there have been few effects so far. US dollar is traded now at 83.2 Yen. It's a little bit higher than 82 Yen which Japan intervened last time. Given that US is betting on the weak currency and beginning QE2, it would be very difficult to turn the trend around.

IMF chief Dominique Strauss-Kahn is quoted as warning on the looming currency war among nations.

Countries risk undermining the global economic recovery if they use their currencies to try to boost domestic growth, the head of the International Monetary Fund warned on Tuesday in a newspaper interview.

IMF Managing Director Dominique Strauss-Kahn made the comments ahead of the fund's October8-10 annual meeting in which currency depreciations by governments to boost exports will be a key issue.

"There is clearly the idea beginning to circulate that currencies can be used as a policy weapon," Dominique Strauss-Kahn said in comments published on the FT website on Tuesday.

"Translated into action, such an idea would represent a very serious risk to the global recovery... Any such approach would have a negative and very damaging longer-run impact," he said.

Brazil, whose finance minister has warned of an international "currency war," on Monday doubled a tax on foreign investors buying local bonds to 4 percent to curb a strong real, boosted by high domestic interest rates and a commodity boom.

"We have seen reports that some emerging countries whose economies face big capital inflows are saying that maybe it is time to use their currencies to try to gain an advantage, particularly on the trade side," Strauss-Kahn said.

"I don't think that is a good solution."

He is right to be concerned about the currency battle under way among major countries. The currency war has been a major subject of worry in the circle of notable economists like Michael Pettis. Three largest creditor countries, namely China, Japan, and Germany, should act as an anchor to underpin the world economy by propping up, not holding down, domestic demand.