Appreciating or Depreciating the Japanese Yen - Research Paper Example

Should Japanese Yen be appreciated or depreciated against U.S. Dollar? Introduction A country’s position in international markets and gains from trade depends a lot on its external policies. Exchange rate has been important for determining price of imported goods with respect to domestic goods. Hence it needs to give sufficient attention as well as importance to the exchange rate policies. If either Japan or United States is considered, both the countries have been in the list of developed nations and at the same time badly affected by recession. The government of Japan or US modifies exchange rates mostly during purchase and sale of either currencies- dollar or yen. Over the years owing to crisis US has adopted unconvincing monetary policies as a measure for bailout and recovering from the miserable economic situation. This has made dollars almost worthless. Under such circumstances Japan has also adopted the mechanism of quantitative easing leading to appreciation of Japanese Yen. But it has not helped the Japanese economy much. Credit growth has been on the slower side (Zarathustra). Taking this as backdrop the paper intends to trace out the effective exchange rate policy for Japanese economy, whether it should be appreciation or depreciation, and citing various reasons and arguments for it. Japanese Yen Japanese Yen is such a powerful currency that it has appreciated even under conditions of quantitative. This phenomenon has continued in Japanese economy for 10 years. In contrast there has been depreciation of Pound Sterling by almost 50 percent of Yen. Depreciation list includes many other important currencies like Euro. Japan has also maintained a low interest rate of 1.092% even in the era of debt crisis. But the ongoing recession has caused economic growth in Japan on the slower side. This has deleveraged private enterprises. This requires Japan to reconsider and frame an effective exchange rate that can lead to economic growth (Zarathustra; Japan Intervenes to Tame Soaring Yen Ahead of G20). Activities of Tokyo for Yen against dollar New York has suffered a fall in recent times which had raised questions on status of US recovery. But ultimately it has been to recover to 88 yen as per the current Tokyo deals. Tokyo has brought back dollars recently and this had helped United States in overcoming recent downturns (Dollar recovers to 88 yen zone in Tokyo after sharp falls in N.Y. +). Currently Japanese Yen is going at 0.0128086 USD. Data from the months in 2011 gives the lowest value as 0.0122797 USD which was for the month of July and the highest value of 0.0131979 USD was traced for the month of October. Average has remained at 0.0129061 USD (Exchange Rates Data). The expansion of dollar has been limited since large number of exporters has been buying the Japanese currency Yen. A low rate of dollar is under the expectations of Japanese manufacturers. Investment in Tokyo is likely to come after the purchase and sale of Spanish bonds (Dollar stays above 78 yen line after losing gains on Tankan results). Some effective actions of Tokyo are required in order to recover the economy from a slow growth situation. Japan has already tried to depress excessive speculation through sale of currency Yen. Tokyo now needs to win the confidence of G20 and make them realize the excessive burden on Yen. Tokyo needs to cite instances of nuclear crisis and an aid of $ 250 million that has been extended for reconstruction and for mending the damages done by earthquake in Japan. Previously Tokyo has given alerts and warning for decreasing strength of Yen. At the same time Tokyo needs to win as well as maintain investor’s confidence in the currency. It has to assure its investors a safer environment for investment than the euro zone which has suffered a massive debt crisis. Effective measures for risk mitigation also need to be taken. Active intervention of Japan is rendered necessary in a scenario where Dollar has touched a record low of 75.31 yen (Japan Intervenes to Tame Soaring Yen Ahead of G20). Tokyo now seriously needs to draw a line and prevent Japanese Yen from further appreciation against the dollars. This even applies for other currencies. The rising Yen had lowered the economy’s competitive nature by makings exports less competitive with respect to prices. Although Yen is still in a stable position the continuous rise has lowered its value when computed in dollar denominated profits. Measures for currency benchmark should be taken urgently by Tokyo through active intervention in foreign exchange markets (Dawson). Should yen appreciate or depreciate? The current strength of Yen and its appreciation has been considered as illogical. Japan has been reported with a contracting economy. It has also got a very low interest rate. The returns on investment are becoming lower. Moreover the country also needs to purchase more assets. Under such circumstances the country should stick to devaluation of Yen. Yen now needs to depreciate against US dollar. This in turn will cause the exchange rate to rise. It will also help to remove high volatility and speculation in stock markets. But at the same time it also involves an underlying risk to appreciate it against dollar (Archive for the Japanese Yen Category). This is shown in the chart below: Figure 1: Area Chart showing depreciation of dollars against other currencies Source: Archive for the Japanese Yen Category Such an area diagram shows that it is better to leave out dollar and focus on other currencies. The data collected on 2011 shows considerable risks on depreciation against dollar. Impact on Industries due to Yen appreciation Japan has always been the leading manufacturers of cars in the world economy. The continuous appreciation of Yen against dollar is expected to affect its automobile sector. The continuous rise of dollars will hurt the profitability of car makers and hence they have opposed such a move. If the trend of appreciation continues much of production will be shifted outside Japan. High currency has already causing low demands from other countries. Further appreciation of Yen against dollars will also lead to about 5 million job cuts in the automobile sector (Dawson). Major car Producers in Japan such as Toyota, Honda, Nissan will have profit levels decreased by 70 billion Yen overall (Tian). Businesses in Japan are very much concerned about Yen appreciation. It has had a negative impact on exports with export volume gradually slipping down. Instead imports have started rising (Kohama & Urata). The following data shows such an instance for the period 1985-88: Figure 2: Column chart showing impact on tradable sector for appreciation of Yen Source: Kohama & Urata Relative price of tradable goods have been lowered with such appreciation of Yen which had hampered the profit of the export sector. On the other hand non tradable have become costlier relative to tradable goods. Thus production of tradable goods and hence the export sector becomes restricted. Impact on Stock Markets due to Yen Appreciation The impact on stock markets has been negative for such Yen appreciation. It has dragged down the growth of stocks. The Nikkei index has reportedly suffered a loss and is now under the 9000 mark. This has been an outcome of disastrous export market scenario. This will also hamper Japan’s recovery process. This is because domestic production is to be affected with major companies suffering a reduction in profits. Such High level of currency has also shifted production outside Japan. If exchange rates continue this framework export sector will have significant reductions in profit levels (Tian). Impact on Industries on Yen Depreciation Depreciation of Yen is assumed to be the instrument that would help to improve Japan’s current economic situation. A weaker Yen is expected to help in growth of the economy. High growth economies are more to prone to synchronized business cycles. The East Asian Countries excluding Japan has achieved rapid growth in industries with the help of international trade. The low income East Asian Countries has established direct linkages owing to their regional proximity. This has helped their collective economic strength. Moreover their unity in monetary and exchange rate policy has done miracles for them. Here the low income countries exclude China and Japan. The Intra Asian Trade which has brought in prosperity for other East Asian Countries have been on the declining side for Japan mainly due to its high level currency (McKinnon & Gunther). Such an instance has been shown in the figure below: Figure 3: Column Chart showing a decline in Intra Asian Trade for Japan Source: McKinnon & Gunther Hence it is apparent that weakening of Japanese currency Yen would help it to get rid of synchronized business fluctuations. The country would then be able to reap the benefits of Intra Asian Trade. This will surely help the Japanese economy to grow. Impact of Yen depreciation against dollar using demand supply analysis Exchange rate influences international prices to a large extent. A depreciation of Yen against dollar would mean a reduction in its value which in turn will increase the value of dollar. The same dollar price of any good produced in US will be costlier in Japan in terms of Yen. This is illustrated by the demand supply schedule below: Figure 4: Demand Supply schedule showing impact of Yen depreciation Yen/M XS XD M Source: Thompson, 14-15 . For the Japanese economy Yen appreciation will reduce imports by raising price of imported goods. Thus import volume will be lowered. This is because higher price of imported goods will reduce foreign excess supply. As exports will rise, this in turn will lead to increased earnings. This is because Yen depreciation lowers the international dollar price of a good. Overall the volume of trade will increase. Trade Policies Politics has a major impact on trade policies. Sometimes it forms an obstacle to free trade. The interest groups have been influential on framing of public policies including trade policies. The so called lobby groups contribute in political terns to office holders, in turn affecting trade policies. These contribution schedules are the ones which can be differentiated locally. There are enough evidences to suggest that lobby groups prefer export promotion measures much more than those restrictions on imports. They support only those policies which lead to inefficient transfer of income. Hence output subsidies in this case will be preferred to quotas or import tariffs as they involve less dead weight loss. Government due to sheer pressure frame policies satisfying the interest of lobbies. Thus trade policies are influenced by these interest groups. As opposition is more against intermediate goods producers they are less subsidized and protected as compared to final good producers. Such no cooperative policy games serves the interests f the public and better policies are framed with pressures from domestic political parties (Grossman & Helpman 833). This protection for sale shows the lobby approach to endogenous trade policy. The framework is based on the assumption that every elected government is responding in a similar fashion to lobbies (Baldwin & Nicoud). Endogenous protection has paved the way to framing of trade policies through discretionary political process. Trade policy here has been considered as a result of political competition (Hillman & Ursprung 347). Policies undertaken by Japan Japanese government has referred to Yen appreciation as their economic pain and realizes the need for currency depreciation. They are aware of the fact that US financial crisis imposes a great danger even to their economy. They are undertaking a sale of Yen to prevent its rise further. Overall the government spending amounts to 4.5 trillion Yen equivalent to $59.2 billion. There have been large scale interventions in currency markets. This has been seen as a way to purchase unilateral intervention of US. Recent decline of Yen against US dollars has been computed as 4 percent. However Bank of Japan’s interference has not completely prevented appreciation (Bank of Japan to see how the dollars tune the fight against global hedge funds?). Conclusion Both Japan and US has been hit by economic crisis and both countries are framing policies for recovery. Japan has always a strong currency Yen which has appreciated against dollar for a decade. But such a strong currency has not lead to any benefits. Instead it has hampered international trade prospects losing out in exports. So Yen depreciation has been considered as the measure to accelerate economic growth. Such a measure will also lower import volume making it profitable for the economy. Japanese government has already taken active measures for Yen depreciation. However external policies relating to trade contain the interests and objectives of lobby groups who are mostly in support of giving subsidies and protection to final goods producers. Moreover Yen appreciation again dollar involves considerable risks. So the paper suggests depreciating against other currencies first and then looking out for dollars. References 1. Archive for the Japanese Yen Category, Forex Blog, 2011, December 15, 2011 from: http://www.forexblog.org/category/japanese-yen 2. Baldwin, Richard E & Nicoud, Frederic Robert. Protection for Sale Made Easy, CEP Discussion Paper No 800, 2007, December 15, 2011 from: http://eprints.lse.ac.uk/19713/1/Protection_for_Sale_Made_Easy.pdf 3. “Bank of Japan to see how the dollars tune the fight against global hedge funds?”, Stock market today, 2011, December 15, 2011 from: http://www.stockmarkettoday.cc/bank-of-japan-to-see-how-the-dollar-tune-the-fight-against-global-hedge-funds.html 4. Dawson, Chester. “Nissan CEO: Japan Should Adopt Currency Benchmark”, Wall Street Journal, 2011, December 15, 2011 from: http://online.wsj.com/article/SB10001424052970204397704577069701893755554.html 5. “Dollar recovers to 88 yen zone in Tokyo after sharp falls in N.Y.+”, BREITBART, 2011, December 15, 2011 from: http://www.breitbart.com/article.php?id=D9GMMGJO0&show_article=1 6. “Dollar stays above 78 yen line after losing gains on Tankan results”, Manichi Daily news, 2011, December 15, 2011 from: http://mdn.mainichi.jp/mdnnews/business/news/20111215p2g00m0bu105000c.html 7. Exchange Rates Data, xrates, n.d, December 15, 2011 from: http://www.x-rates.com/d/USD/JPY/data120.html 8. Grossman, Gene M & Helpman, Elhanan. “Protection for Sale”, The American Economic Review, (1994), 84.4, pp.833-850, December 15, 2011 from: http://pages.uoregon.edu/bruceb/Andrea.pdf 9. Hillman, Arye L & Urpsrung, Heinrich W. “Multinational Firms, Political Competition and International Trade Policy”, International Economic Review, (1993) 34.2 347-63, December 15, 2011 from: http://www.jstor.org/pss/2526917?searchUrl=%2Faction%2FdoBasicSearch%3FQuery%3Darye%2Bhillman%26gw%3Djtx%26prq%3Durpsrung%26Search%3DSearch%26hp%3D25%26wc%3Don&Search=yes 10. “Japan Intervenes to Tame Soaring Yen Ahead of G20”, Daily Live, 2011, December 15, 2011 from: http://www.thisdaylive.com/articles/japan-intervenes-to-tame-soaring-yen-ahead-of-g20/101728/ 11. Kohama, Hirohisa & Urata, Shujiro. The Impact of the Recent yen Appreciation on the Japanese Economy, The Developing Economies, 16.4, (1988), December 15, 2011 from: http://www.ide.go.jp/English/Publish/Periodicals/De/pdf/88_04_03.pdf 12. McKinnon, Ronald & Gunther, Schnabl. “Synchronized Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate”, IMF, 2003, December 15, 2011 from: http://www.imf.org/external/np/seminars/eng/2004/ecbimf/pdf/schnab.pdf 13. Thompson, Henry. International Economics: Global Markets and Competition, London: World Scientific Publishing Company, 2006 14. Tian, Fibrz. “Appreciation of the Yen Dragged down Japans Economic Recovery”, isnare, 2011, December 15, 2011 from: http://www.isnare.com/?aid=596735&ca=Business+Management 15. Zarathustra, “Japanese Yen And Its Implication For US Dollar,” Also Sprach Analyst, 2011, December 15, 2011 from: http://www.alsosprachanalyst.com/markets/japanese-yen-and-its-implication-for-us-dollar.html Read More