Bank of Japan's challenge in 2016 - maintaining the yen exchange rate

THE problems confronting Japanese economic policymakers in the new year are many, not least the need to expand demand in a shrinking population and a slowing global economy. But the most difficult task lies with the Bank of Japan (BOJ), which must try to prevent the yen from appreciating without appearing to shape policy specifically to that end.

The extent to which Japan's economic recovery is dependent upon maintaining roughly the current yen exchange rate is not perhaps generally appreciated. It is not only a question of maintaining export competitiveness and (tax-yielding) corporate profitability, but also of building an economy based more upon domestic and inward capital investment, and upon tourism.

The yen has dealt Japan two body blows - one external and another self-inflicted - in recent decades. First was the Plaza Accord of 1985 in which Japan's trading rivals coerced Tokyo into accepting a competitiveness-blunting currency appreciation that took the yen from a pre-Plaza 240 to the dollar to nearer 120 within a year or so.