Demand Management

Noah Smith's contention that Japan is merely talking down the yen is thought-provoking, as is the commentary Yglesias has been writing. For example:

Currency Wars Aren't Zero-Sum

In a demand-deficient environment, currency wars would help. Perhaps in the far off distant future a sane IMF and WTO would weigh in so nations wouldn't go overboard.

Currently:

1) the US has a large output gap, high unemployment and low inflation

2) Japan is stuck in a deflationary rut

3) Europe also is treading water

4) China is sucking out demand of 1-3 by keeping its currency low.

1-3 have 4 options of adding demand to their economy.

1. Take from creditors/savers and give to debtors via inflation.
2. take from rich nationals and give to the government to spend via fiscal policy. Deficit spending would be taking for future generations.
3. devalue/bring your currency to down to take from foreign exporters and give to national exporters. This would also hurt savers as their savings is devalued and can purchase less from foreign exporters. It is more politically feasible than merely taxing rich nationals in that the rich are a powerful political constituency
4. there's the expectations channel which is more tricky. Investors move their money to riskier investments because of expectations of rising inflation and economic growth. See 1 above.

A future super-combo IMF-WTO global demand management institution could adjudicate a currency war.

The more inflation one had and the more progressive a tax system, the less one would have to depend on exports. 

Once a nation had closed the output gap and had full employment, it would no longer be allowed to manipulate its currency.

Should Japan Reflate? by Noah Smith

In the comments

• Absalom: "The Japanese unemployment rate is apparently 4.1%. There may be little that can be done through monetary easing that would make much difference. My understanding is that one of the things holding the Japanese economy back is that the domestic economy is heavily regulated. De-regulating the domestic economy might be a way to bring some dynamism to the economy (but at the potential cost of increased unemployment)."
• Noah Smith: "Once again, Absalon and I are in complete agreement...Absalon, you hereby win "commenter of the month"..."
• Me: "I'm a complete amateur and find the discussion thought-provoking.
  
  If the unemployment rate is so low, wouldn't talking down the Yen be inflationary as the export sector picks up and looks to hire more workers? Or would they just add more robots?"