Yen and the art of currency maintenance

Japan ($4.8 trillion in GDP last year) is the largest economy in the world after the US ($14.3 trillion). Because it has continuously run current account surpluses; it also had the largest net foreign exchange position, namely more foreign exchange assets than liabilities, with $5 trillion in gross foreign exchange assets and $3.1 trillion in net foreign exchange assets at the end of September 2008. In contrast, China had $4.4 trillion in GDP, $2.3 trillion in gross foreign exchange assets and $1 trillion in net foreign exchange assets at the end of 2007.

In other words, Japan still has three times bigger net foreign exchange assets than China, even though the latter has more foreign exchange reserves.

In the 1960s, when the yen was still fixed at 360 to a US dollar, the Japanese economy grew at an average of 10 percent a year. In the 1970s, when the yen began to appreciate and there was an oil shock, the growth slowed to an average of 5 percent.