US Dollar and Japanese Yen Relationships - Research Paper Example

US Dollar and Japanese Yen Relationships Introduction Ever since the 1940s, the U.S. dollar has served as the major reserve currency of the world. All through the world, many people are using dollars as a means of exchange and unit of account, and several nations store wealth in dollar-denominated assets such as Treasury securities. A strong and extravagant U.S. financial system and its safe-haven position for global investors sustain the dollar’s attractiveness. The world has relied on the dollar, and world trade in numerous products is valued in dollars (Carbaugh & Hedrick, 1). Demand and supply of the Japanese Yen, which is another world’s reserve currency, drives its value. Historically, the Bank of Japan that is the nation’s central bank has constantly reduced interest rates in order to prompt economic growth. Reduced interest rates since the mid 1990s and a prepared liquidity for the Yen quickened investors to borrow money in Japan and invest it in other nations. The Bank of Japan constantly preserves a policy of trying always to keep the Yen weak in relation to other currencies. Conversely, a tremendously low inflation rate and a weaker Yen have boosted the Japanese export division during this period. Japan had a current account overflow of roughly $227 billion in 2007 of which $113 billion came from its trade superfluous against other nations. By sustaining a high demand for the Yen, the export division has boosted it. Japanese interest rates relative to other countries and the competitiveness of the Japanese export division will dictate the value of the Yen. In 2008, both the European Central Bank and Federal Reserve forcefully reduced interest rates in the European Union and the US (Doctorhousingbubble.com, 1). In Japan, there was an economic bubble from 1986 to 1991, in which stock prices and real estate significantly inflated. The bubbles subside lasted for over a decade with stock prices under siding in 2003, until striking low in 2008 due to the present global crisis. The Japanese asset price bubble caused what the Japanese call the Lost Decade (MuseumStuff.com, 1). Japan employed severe policies and tariffs to push people to save their income in the period following World War I. loans, credit became easier to get with more money in banks, and the yen boosted against foreign currencies with Japan encountering large trade overflows. This permitted local companies to invest in capital reserves quite more easily compared to their competitors overseas. In turn, this decreased the price of Japanese-made goods and broadened the trade overflows further. In addition, financial assets became quite productive with the yen appreciating. Moreover, with a lot of money readily accessible for investment, assumption was inevitable, mainly in the real estate market and the Tokyo Stock Exchange. Furthermore, banks gave increasingly uncertain loans (Findtarget.com, 4). The easily attainable credit that had assisted to create and swell the real estate bubble persisted for quite a lot of years to come. For instance, for as late as 1997, banks were still making loans that had a low likelihood for repayment. Investment staff and Loan Officers had a difficult time finding anything to devote in what would return a profit. Sometimes, they would opt to depositing their block of investment cash as normal deposits, in a competing bank, which would bring wails of protests from that bank's Loan Officers and Investment staff. As the government started to promote failing businesses and banks, correcting the credit problem became even harder. Ultimately, a carry trade emerged in which money was borrowed from Japan, invested for profits in other countries and then the Japanese were paid back with a good profit for the trader (Findtarget.com, 7). The dot-com bubble was a tentative bubble between 1995 and 2001 during which the stock markets of the U.S. and other western countries experienced quick growth aggravated by the Internet division and related sectors. Initial Public Offerings of stocks and Venture capital initially financed these companies. The stocks were originally overvalued due to the innovation of the stocks and the complexity of valuing the non-traditional firms. Massive demand from investors aiming to be in on the ground floor of the next big stock exchange caused the stock price to increase immediately the company went public. This applied even if the company had never made a profit or even a flow of incomes (Econport.org, 2). The dot-com bubble is the era of investment and assumption in Internet firms. It happened between 1995 and 2001 due to a number of factors. Internet users, who the companies considered as possible consumers increased remarkably in 1995. Consequently, several Internet start-ups were initiated in the mid to late 1990s. After the .com in several web addresses, these companies were labeled as dot-coms. In addition, with the hopes of controlling the market, many of these companies employed strange and daring business practices. Most engaged in a strategy of growth over profit, assuming that if they increase their customer base, their profits would increase as well. Moreover, in attempting to seduce many of customers for a specific need, many dot-coms applied a great deal of energy in market control (Smith, 2). The United States has put much effort to uphold the dollar’s value against major currencies for most of this decade. The dollar devalued by about 33 percent during 2002-2009. In addition, the global financial crisis of 2007-2009 disclosed structural weaknesses in the U.S. economy. Moreover, with the financial crisis pushing the United States to entrust trillions of dollars to save its economy, the fear is that inflation will further debase the dollar. China, which has about 70 percent of its $1.9 trillion foreign-exchange stores in dollars, is particularly susceptible (Carbaugh and Hedrick, 2008). The grounds behind the current global crisis are compound, and are associated with the decline of the financial market of the last 20 months or so. In US financial system, banking industry has been roughly hit due to mortgages backed by sub- prime mortgages dropped in value. Because of bad debts, financial establishments were unwilling to lend money and therefore construction industry’s production faced reductions in credit lines, which contributes 15% of US productivity (Malik, et al, 3). For numerous reasons, Asia financial crisis is of interest to the U.S. government. Firstly, efforts to solve the problems of the crisis are initiated by the IMF with collaboration from the World Bank and Asian Development Bank and promises of standby credit from the Exchange Stabilization Fund of the United States. The second reason behind this is that financial markets are entwined. Everything that occurs in Asian financial markets also has an effect on U.S. markets. Thirdly, Americans are main investors in the Asian region, both in the form of investments in financial instruments and supplementary of U.S. companies. The other reason is that the currency crisis affects U.S. exports and imports in addition to capital flows and the value of the U.S. dollar. This means that the U.S. shortage on trade is now increasing as these countries export more and import less. Moreover, the turmoil is causing financial disorder that is exposing limitations in several financial institutions in Asia; some have gone bankrupt. The monetary crisis of the troubled Asian economies is negatively affecting the United States, Japan, and others. The crisis also has impacts of on the American financial institutions and U.S. financial system (Nanto, 6). Following the 1985 Plaza agreement, main powers interceded in currency markets to weaken the dollar and make the yen stronger. The objective was to open Japan to additional imports and slow down its export juggernaut. This is reverberated in contemporary international forces on China. The yen speedily doubled in value, and goods values increased, to 50 times their 1950s levels in some instances. At that time, even the constricted wooden house where this correspondent lived in the Osaka area in 1989 was worth $1 million. Businesses increased their prices to ridiculous levels, and Japanese was continually buying $60 bottles of wine and $100 melons since they feared prices would increase further while expecting Japanese to get wealthier. However, when the bubble ruptured, and the stock market standard index, shrank from 39,000 to 9,000 in the 1990s, prices failed to fall accordingly. Several farmers, property owners, and suppliers obstinately held their prices firmly; hoping consumer demand would get well but did not (Johnson, 1). As Kumar asserts, the visions for a strong financial recover are growing dimmer as leading pointers sag in the U.S. Moreover, while some prestigious investors were alerting about inflation, they now appear to be losing the ground to those foreseeing devaluation. With possibilities of a long period of reducing prices getting stronger, several on Wall Street are turning to Japan's dreaded lost decade beginning in the 1990s, for insights concerning how things might turn out in America. In addition, while it is simple to argue that U.S. stocks may maintain better than their Japanese counterparts did due to persistent layoffs and financial manipulation by American companies, investors should look at a much higher notion (8). Conclusion The current condition of the U.S dollar and Japanese Yen relationship is a much deep issue that is greatly affecting the global economy and markets. The United States must execute a responsible financial policy. It should endeavor to assume new strategies in the near future; while the economy is still recovering. These strategies should be enforced over the medium and long terms, as growth recommences and the nation can contain economic tightening without jeopardizing another depression. The United States should also come up with more result-oriented strategies that should protect its economy from global crisis and the possibility of its currency further weakening. Works Cited Carbaugh, Robert & Hedrick, David, W. “Will the Dollar be dethroned as the Main Reserve Currency?” Global Economy Journal l.3 (2009): 1-14. Print. Nanto, Dick, K. The 1997-98 Asian Financial Crisis. 1998. Web. Doctorhousingbubble.com. Japanese asset bubble: lessons from the economic asset bubble of Japan, 2006.Web. Econport.org. The Dot-com Bubble. 2006. Web. Findtarget.com. Japanese asset price bubble. 2010. Web. Johnson, Christopher. Japan caught in deflation conundrum. 2010. Web. Kumar, Vishesh. Deflation: Bad for Japan, but Brutal for the U.S. 2010. Web. Malik, Nida. et al. The Impact of Recent Global Financial Crisis on the Financial Institutions in the Developing Countries: the need for Global Solutions. 2010. Web. MuseumStuff.com. Japanese Asset Price Bubble. 2010.Web. Smith, Samson E. What was the Dot-com Bubble? 2003. Web. Read More