I have talked about how many analysts misunderstand what Abenomics is really about (the need for Japanese nominal GDP to grow), which is a reflection of inflation as much as of real growth. One key part of Abenomics has been to get the exchange rate down. This has got nothing to do with currency ‘wars’ but a lot to do with the price level. In a completely open economy, a 10% fall in the exchange rate should result in a 10% rise in the price level, all other things being equal. This is why some argue that devaluation of a currency does not work; any short run competitive advantage from a devaluation is lost through inflation. But in an economy such as Japan’s where there is no nominal GDP growth, this is irrelevant because it is nominal growth we want not real growth in order to escape the liquidity trap. Obviously as in an economy like Japan’s which is not particularly open, a 10% fall in the exchange rate will not lead to a matching rise in the price level, perhaps rather 3%. But the point is still the same. Initially Abenomics was very successful in this respect. The exchange rate fell from a peak of Y77 in the autumn of 2011 to a low of Y123 toward the end of last year. Since then it has risen to Y110. Quite why it has done so is a bit of mystery and it seems that the authorities are not concerned about this rise. This is a mistake. Not only do policy makers have to create inflation, they have to make people believe that this inflation is for real. The Japanese authorities have a bad habit of giving up on these strategies half way through the process and retreating back to the mantra that there is nothing more they can do. There are many countries where creating inflation is not a problem; just ask the Latin Americans for advice. Citing a poor real growth outlook due to an appalling demographic profile or declining productivity is to miss the point completely. Sadly this seems to be the case. If the yen continues to appreciate, then the bears of Abenomics will prove to be right and this will prove be yet another Japanese policy failure. It was the right policy with the failure lying in the implementation.