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This article focuses on the impact of fall of values of U.S. dollars on the world's economy, specially on the economy of Japan. No country has supported the dollar more steadfastly than Japan, with the Bank of Japan by far the largest foreign holder of U.S. treasury bills. With each decline in the dollar there is renewed concern in Japan that the yen will eventually reach a tipping point, beyond which Japanese exports will lose their competitiveness. As long as Japan's surpluses remain in dollar-denominated assets and monetary authorities cannot create their yen equivalents inside the domestic financial system by monetary stimulation, the surplus will continue to constitute a huge deflationary drain of resources out of Japan's financial system with significant opportunity costs. The prospects of a prolonged decline in the U.S. dollar, be it precipitous or incremental, means that, even on its own terms, Japan's support for the dollar is likely to prove futile. It is argued that any dramatic fall in the dollar would literally wipe billions off the value of dollar assets held by Japanese and other foreign investors. INSET: IS A DOLLAR COLLAPSE IMMINENT?.

Reports that the Bank of Japan has predicted that the country's deflation will persist during 2004.