I agree with everything that Matt Yglesias says in his recent Slate article, until the very last point.
There’s excessive demand for Japanese money and insufficient demand for Japanese goods and services. The Bank of Japan ought to be addressing this issue by providing the money the world wants so Japanese workers—especially in the youngest generation—can get meaningful hours on the job.
Japan has been thrown back into a near liquidity trap again – interest rates are at zero and economic growth is still struggling. Although devaluing the Yen would stimulate aggregate demand by boosting exports, it will be unable to do so.
During Japan’s last liquidity crisis Ben Bernanke (still at Princeton) advocated devaluing the Yen. Bernanke even pointed out that Japan’s trade partners were actually calling for Japan to devalue.
Now, Japan has already successfully intervened in currency markets in the last year with the cooperation of the G7, but only because of the catastrophic earthquake and tsunami. With all of Japan’s major trading partners, especially the U.S., experiencing sluggish economic growth, devaluing the Yen will be more difficult. Japan is politically constrained because its trading partners want to keep the value of their own currency low to stimulate more growth at home. No G7 countries are going to support devaluation of the Yen. Japan’s recent attempts to devalue the Yen have been unsuccessful and Japan has faced criticism for its actions from the U.S.
The BoJ can’t provide more Yen, because the reality is that the rest of the world doesn’t want it.