ABSTRACT
The weakness of the US dollar—its depreciation relative to the yen— carries with it little implication or significance with respect to the underlying health of the US economy or its prospects for sustained growth. A convincing explanation for the substantial depreciation of the dollar relative to the yen lies in the unexpected length and depth of the Japanese recession. To relieve this liquidity crunch at home, Japanese financial and nonfinancial businesses have been reducing their large holdings of dollar assets—including US equities, real property, and government bonds and converting the dollar proceeds to yen. The low level of imports has reduced Japanese demand for dollars, while swelling Japan's current account surplus with the US to an estimated $80 billion in 1994 compared to $60 billion in 1993. These remedies include reducing Japan's tax rates, removing its consumption tax, increasing public works expenditures, and easing credit policy.
