The Winner in the Devaluation Race

Treasury Secretary John Snow has made it clear that the eight-year-old U.S. strong dollar policy is now a "not-so-strong" dollar policy.

But the U.S. isn't the only country that wants to wring economic benefit out of a cheaper national currency. The world's second-largest economy, Japan, has long had a strategy to keep the yen weak to bolster exports.

Let's attempt to view the U.S.' currency policy shift from the perspective of a Japanese monetary policy official to see who might win in the race to have a cheaper currency.

A weak yen makes Japanese products relatively less expensive, boosting overseas sales. A company such as Toyota loses about 20 billion yen ($171 million) in operating profit for every one yen rise against the dollar, according to analysts. Multiply those lost sales over many companies, and that amounts to hundreds of billions in lost revenue. Lost sales aren't what a bureaucrat charged with pulling an economy out of a 10-year slump wants to see.

The way to combat the unwanted rise in the yen is to intervene in international currency markets, buying dollars (or euros) and selling yen. Last week, Japan reported that it spent 2.38 trillion yen ($20.36 billion) buying dollars and euros to weaken the yen. Recently, Japan has stepped up its activity in the foreign exchange markets. In a one-week period in May, the Bank of Japan spent nearly the entire amount it spent last quarter -- 2 trillion yen -- to stem the slide of the dollar.

While government intervention in the currency market doesn't have a great track record of working out over the long term, massive expenditures over the short- and medium-term by well-capitalized institutions like the BOJ have definitely proved effective.

With so much money being spent to keep the currency weak, you might think there's a limit to the amount Japanese finance officials would be willing or able to spend to defend against a strengthening yen. But think about it. The Japanese don't have anything to lose by printing yen and buying dollars.

Mired by deflation at home, the inflationary act of printing yen is precisely the remedy required to spark the price growth that will encourage domestic spending and investment. In fact, with Japan unable to kick-start the economy through domestic monetary policy measures, deflation is shaping up to become Japan's largest export in 2003.