The dollar’s recent decline to a yen-dollar rate of 100 triggered numerous calls for exchange rate intervention. Advocates noted that the yen-dollar rate had not been so low since 1995 and that the dollar has fallen more than 20 per cent since 2002. But intervention proposals misunderstand the significance of the 100 yen-dollar rate, the recent dollar declines, the need for the increased US competitiveness and the potential adverse effects of intervention.

Comparing the current exchange rate with the 100 yen per dollar in 1995 is misleading because of differences in US and Japanese inflation. Between 1995 and 2007, consumer prices rose 37 per cent in the US but remained virtually unchanged in Japan (a decline of less than 1 per cent). A dollar buys substantially less in the US today than it did in 1995 while 100 yen buys the same amount in Japan as it did then. Since it takes $1.37 in the US today to buy what a dollar bought in 1995, the yen would have to strengthen to 73 yen per dollar (i.e., 1 divided by 1.37) to cause a dollar to buy the same amount in Japan as it did in 1995.