Robert Rubin, the former US Treasury Secretary who added American firepower to the successful defense of the yen in the late 1990s, had some rules for foreign exchange intervention. Such movements had to be very rare and sensational. The more surprise the better, as a market whose value has soared to $7.5 trillion a day could easily undermine such a move.
As the former head of the Goldman Sachs Group, Rubin also recognized that currencies ultimately reflect the underlying conditions of an economy, compared to peers. Japan would do well to keep this in mind as it debates how and when to fight a rising dollar.
Governments do have freedom of choice, but the objectives must be clear. Trying to engineer a sustained rally in the yen is a non-starter as long as the US-Japan interest rate spread is so wide, with little prospect of meaningful change for any significant period of time. What officials can do is contain the yen’s weakness, smooth out sharp declines and make some gung-ho dealers think twice, at least occasionally. The more modest and plausible the ambition, the greater the chance of avoiding disappointment – and maintaining credibility.
