Tokyo — Japan’s stock markets are caught in a vicious cycle, a downward spiral of take-over fears and flagging stock values that politicians and regulators seem incapable of bringing to an end. Sadly, the biggest losers here are not those who play the market, but those Japanese households that are unable to rely on the markets to provide an adequate return on the pension-fund assets invested there.

The U.S. dollar last week appeared mercifully to end its plunge. World markets cheered, and the immediate financial crisis in the U.S. abated. But this week the dollar is retesting all-time lows versus the euro and yen, and commodity prices, capital flows, and trade remain vulnerable to its movements. Inflation in dollar-linked China is rising fast, and an over-strong yen could thwart Japan's recent recovery after its painful 1990s deflation. In the U.S., currency swings are destabilizing the economy and fueling anti-trade populism. After a decade of wild instability, it's time to rethink global currency markets and monetary policies.

Between the last trading day of 2007, and its low earlier this week, the Japanese yen soared more than 14%—from 111.7 to 96.1 yen to the dollar. This is the most rapid three-month increase in the value of the yen versus the dollar since 1998. In addition, the last time the yen spent time below the 100 mark was in 1995, when it hit a postwar high of roughly 83.

What’s the biggest economic topic for China-watchers this year? In a word, inflation. From absolute obscurity only a few quarters ago, inflation has come raging forward to command the full attention of domestic policy makers, global investors and even casual observers as “the” issue of the moment. But is the problem really as serious as all that?

All indicators show that the booming Indian economy—Asia's "Rising Elephant"—has begun to slow. The manufacturing sector, which grew at double digits for the past two years, grew at just 5.3% in January. During the same month, core-sector growth—defined as power, steel, cement and oil—has halved since January 2007 to 4.2%. Inflation is over 5.92%, household spending on consumer durables is down, the rupee remains unstable against the dollar, and the stock market remains near historic lows, losing 30% of its value in just over two months.

In 2007, Chinas current account surplus"the excess of its revenues from exports of goods and services, holdings of foreign assets, and foreign remittances"was approximately $300 billion, two-thirds of which represent its bilateral surplus with the United States. Chinas global current account surplus is about 10% of its GDP.

There is much worry about the strength of the American economy and the future role of the U.S. dollar these days. The subprime crisis has raised concerns about the stability of the U.S. financial system and growth prospects for the U.S. economy in general. Financial flows into the U.S., which have fuelled economic growth over the past decade, have decreased markedly since last summer, reflecting and reinforcing uncertainty about the U.S. economy. The depreciation of the dollar has gained speed and fear is growing that this might develop into a severe dollar crisis.

Mizuho financial group reported that its subprime mortgage loan related losses are turning out to be larger than they thought three months ago. According to their Nov. 14 press release, they expect the losses to top $1.5 billion in fiscal year 2007. Nomura disclosed about the same amount of losses earlier this month.

Right now, the consensus is that there is only one way for the renminbi to go: up.

Heres a laugh: The World Bank has announced a more reliable measure of the size of the Chinese economy using purchasing power parity. The new method at one stroke shrinks the size of the nations economic activity by a full 40% (and it did the same for India). But it still puts China, where hundreds of millions of people are mired in poverty, No. 2 in the world, behind the U.S. and ahead of Japan.