Lawrence,
Congratulations on some very original thinking on the determination of exchange rates. I have never attempted to predict currencies by using monetary aggregates. I come from the PPP (purchasing power parity) school of exchange rates. (We have a lousy football team. <g>) The reason I have never undertaken a study of rates using aggregates is exemplified by your final paragraph.
The puzzling thing, though, is that the rapid monetary inflation in Japan was not accompanied by much consumer inflation. Here, the answer is less clear. I think it's because of Plaza, the rapid yen appreciation, and the resulting asset bubble that soaked up all the money being printed. The rapid money growth ended with the prickling of the bubble in the early 90s, and has remained fairly low since.
One flaw, I have always felt, in monetarism is that "money" is not the simple beast it was in an earlier age when it was the "source of exchange" proxy. Today you can take out a loan against your house and stick the money in the stock market. This could be what has happened in Japan as money has flowed into asset speculation, rather than the productive economy. Granted over time the growth of money should equal inflation + output, but over time the nature of money has changed so much that you end up comparing apples to oranges. The financial innovation of the last 10 years has been astounding. Of course I have never been an advocate of monetarism anyway, feeling that this school of thought has the cause and effect backwards. (That comment always ruffles some feathers.)
Nevertheless, if your model turns out some interesting insights, please post them. There may be some useful correlation between monetary aggregates, growth, inflation and exchange rates. If it produces some profitable information, I may be willing to leave my PPP alma mater and enroll in another school.
-Robert
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