November 24, 2002	Sunday	Ramazan 18, 1423

PHILADELPHIA, Nov 23: Should Japan finally escape the ravages of deflation it would likely involve a sharp depreciation of the yen and global policy coordination would be needed to mitigate its impact on other countries, a top official for the International Monetary Fund said on Friday.

Kenneth Rogoff, Research Department Director at the IMF, said while there was generally not a lot to be gained from policy coordination between the world’s three major economies, there could be an exception should Japan eventually manage to reflate its economy.

ddressing a forum organized by the Philadelphia Federal Reserve, Rogoff said the interests of the G3 economies — the US, the euro zone and Japan — are best served by their central banks looking after domestic conditions.

For G3 countries as a whole, keeping your own house in order goes a long way to being a good international citizen,” Rogoff said.

But there was a large exception when one of the major currencies was stuck in the “sand trap” of deflation.

That’s not least because the monetary instruments that central banks have at their disposal don’t work as well in a sand trap, and the spillover effects of an attempt to get out could be quite large, he said.

When the day finally comes that the Bank of Japan successfully engineers reflation instead of deflation, it’s very likely we would see a very sharp depreciation in the yen, said Rogoff.

In such a case, it could be argued that supportive action from the Federal Reserve and European Central Bank could mitigate any overshoot in the currency, and at the same time spur global demand and cushion the impact of the yen’s depreciation on Japan’s neighbors.

Japan has been stuck in a deflationary trough — where prices are declining broadly across the economy — for several years and one way out would be to print more yen until the value of the currency fell far enough to generate inflation.

Deflation has also become a hot topic in the United States with a number of Fed officials recently arguing that, while the risk to the US is small, the central bank stands ready to do whatever it takes to avoid falling into the trap.

Indeed, one possible remedy touted, in theory at least, is a depreciation of the dollar.

But with the US facing deflation dangers of its own, analysts have wondered whether it would acquiesce to an engineered fall in the yen which drove up the value of the dollar, push down import prices and so exacerbate any deflationary trends.—Reuters