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The market's nerves have also been rattled by Bill Clinton's new nominees to the Fed's Board of Governors: Alan Blinder and Janet Yellen are both suspected of being soft on inflation. This,
in combination with the cheap-dollar policy, has cast serious doubt on the administration's support for the Fed's anti-inflation policyand at the very time when some leading indicators of inflation are starting
to flash. With the American economy in its fourth year of expansion, the remaining slack is fast disappearing. Unemployment, at 6.4% of the labour force, is now within a whisker of
the rate at which inflation lids often started to climb; and commodity prices are rising. All the more important that the administration does not make the Fed's job harder through foolish
talk. Over the past year, the administration has displayed a worrying misunderstanding of the use of exchange rates as a tool of economic policy. The trouble with the textbook theory that
a rise in the yen will trim Japan's trade surplus is that it assumes governments can steer currencies without touching fiscal or monetary levers. They cannot, except very briefly-and, even then,
unpredictably. The yen-dollar exchange rate, for example, is influenced by investor's expectations about the relative tightness of monetary policy in America and Japan. America's former desire for a cheap dollar implied
a willingness to run a lax monetary policy, which, pushed up inflationary expectations and hence bond yields. In Japan, in contrast, the severe overvaluation of the yen (relative to its purchasing-power
parity of around Y150) constitutes an excessively deflationary monetary policy. Although nominal interest rates are at a record low, falling prices have left real interest rates painfully high, squeezing domestic demand
and imports, Japan's trade surplus therefore still looms large. The passage highlights how America has mishandled the Forex Policy by giving confusing signals to the public. Also it shows how America
in combination with the cheap-dollar policy, has cast serious doubt on the administration's support for the Fed's anti-inflation policyand at the very time when some leading indicators of inflation are starting
to flash. With the American economy in its fourth year of expansion, the remaining slack is fast disappearing. Unemployment, at 6.4% of the labour force, is now within a whisker of
the rate at which inflation lids often started to climb; and commodity prices are rising. All the more important that the administration does not make the Fed's job harder through foolish
talk. Over the past year, the administration has displayed a worrying misunderstanding of the use of exchange rates as a tool of economic policy. The trouble with the textbook theory that
a rise in the yen will trim Japan's trade surplus is that it assumes governments can steer currencies without touching fiscal or monetary levers. They cannot, except very briefly-and, even then,
unpredictably. The yen-dollar exchange rate, for example, is influenced by investor's expectations about the relative tightness of monetary policy in America and Japan. America's former desire for a cheap dollar implied
a willingness to run a lax monetary policy, which, pushed up inflationary expectations and hence bond yields. In Japan, in contrast, the severe overvaluation of the yen (relative to its purchasing-power
parity of around Y150) constitutes an excessively deflationary monetary policy. Although nominal interest rates are at a record low, falling prices have left real interest rates painfully high, squeezing domestic demand
and imports, Japan's trade surplus therefore still looms large. The passage highlights how America has mishandled the Forex Policy by giving confusing signals to the public. Also it shows how America
