Japan in the World Economy - Research Paper Example

Japanese Yen movement relative to US$ - nominal terms& real terms (Source: Statistical Handbook of Japan, (Source: World Data Bank) Since 1990, the nominal exchange rate of Japanese Yen has been increasing as can be seen from the above graph. The Yen became extremely strong against US$ in the mid 1990s reaching almost 80 Yen. In the later years, this trend slowly diminished making Yen weaker against dollar.The Yen has remained in the ranges of 100 and 120 during the 1999 which in contrast has remained low during 2000. This pattern is mostly observed in gold standard or hard peg countries trying to unwind an overvalued currency. During the late 2008, Yen began to appreciate sharply against dollar and was valued at 86.15 yen in 2009. At the end of 2010, the yen was rated at 88.66 yen. (Source: World Data Bank) The real effective exchange rate as seen from the graph has remained volatile between 1980s and 1990s. During the era of 2000 and forward, the value of yen has declined. It has been going down from the price of 120 dropping to 80. After the financial crisis of 2007-2008, the yen is seen to gain value and is rising till date. Japan’s real exchange rate has appreciated over the years due to the rapid increase in the high-productive manufacturing sector. Trends in Japanese Exports – in terms of value and composition (Source: World Data Bank) The exports in terms of value are an important element in the present Japanese economic adjustment. The structure of exports as well as imports has changed considerably over the years. The above graph shows the trends in exports value since 1980 till date. There has been a constant growth in exports since 1980s till 2000 with minor fluctuations in between. These exports can be attributed to the increase in IT-related goods, consumer goods and US been the largest trading partner. (Source: Statistical Handbook of Japan, 2010) According to the composition of exports, the leading export commodity was transport equipment which is 22% of the total exported value. It is followed by electrical machinery constituting 20% and general machinery 17.8% of total value exported. Another interesting characteristic of Japanese export is the increased proportion of high-value added products such as integrated circuits and steel which are increasing in total Japanese exports. Relationship between exchange rate (nominal and real) and exports The changes in trade surplus, given by the difference in value of exports and imports, are influenced by price changes. Appreciating yen will lower the price of imports relative to exports causing the trade balance to be higher. Given this condition, during 1990s the yen appreciated 20% causing more imports and fewer exports. This affected the competitive price position of Japanese exports in foreign markets. The Japanese trade and exchange rate are very closely related. The real exchange rate of yen is highly positively correlated to Japanese trade and specifically exports price relative to import prices. For instance, between 1990 and 1995, the yen appreciated by 40% against dollars. If the prices of yen and dollar would have remained the same, Japanese products would have been 40% more expensive in comparison to US goods. The government intervention to cut down yen export prices and shifting to manufacturing high-value goods helped the growth of Japanese exports during the 1990s. The export volume grew annually at a rate of 5% through 1990 and 1995. The Japanese exports took a downfall in late 1990s owing to the drop in sales in the European market which is large enough to drop the Japanese exports by 10%. In 2003, when the nominal yen/dollar exchange rate was at 120, the exports rose rapidly which again declined in 2007-2008 because of the financial crisis which cause the appreciation of yen below 90 to dollar. This caused the Japanese exports to fall drastically. Impact of the Plaza Accord In 1985, the G-5 nations including Japan forced United States to devalue dollar because of the current account deficit. The G-5 nations were facing current account surpluses and negative GDP growth which was threatening the external trade. It was the first time that the central banks intervened in the currency market to revalue the exchange rate system. The impact of the Plaza Accord of the Japanese yen is highly significant. The Plaza Accord caused the yen to appreciate sharply by shifting the expectations of market participants about the exchange rate upwards. This resulted in doubling of the yen’s value vis-a-vis the dollar in two years from 240 to 120 a dollar. (Source: Business Insider) The higher yen encouraged the Japanese industries to shift their production overseas particularly in Southeast Asia to benefit from the availability of cheap labor there. This is particularly true in case of Japanese automakers, which increased the production in US despite trade protectionism in the country to take advantage of the strong yen. During the early 1990s, the number of assembled vehicles in US by Japanese automakers exceeded their US-bound exports. To cushion the impact of the stronger yen on Japanese economy, the policy makers kept the Japanese monetary policy loose in order to encourage domestic demand. This was kept longer than necessary and resulted in bubble economy during the late 1980s causing inflationary prices for assets. Although the Japanese exports did not decline to US after the Plaza Accord but trade friction grew in US causing bilateral trade issues. Therefore, Japan was pressurized to use export restraints which forced Japan to overhaul its economic structure along with macroeconomic policy which included savings balance, investment balance, and business practices and so on. These adjustments caused the real exchange rate to remain highly volatile which would take time to restore it to the equilibrium position. References Dekle, R., Fukao, K. and Ungor, M. 2009. The Japan-U.S. Exchange Rate, Productivity, and the Competitiveness of Japanese Industries. Global COE Hi-Stat Discussion Paper Jeong, J. 2011. What drives exchange rates?: The case of the yen/dollar rate. Multinational Business Review. http://findarticles.com/p/articles/mi_qa3674/is_200010/ai_n8904111/ (accessed 19 Jan, 2011). Martin, S. 2009. Why has Japan been hit so hard by the global recession? IMF staff position note, March. Masaki, H. 2005. China and the legacy of the Plaza Accord. Asia Times Online. http://www.atimes.com/atimes/Global_Economy/GI21Dj01.html (accessed 19 Jan, 2011). Mitchener, K. and Voth, H. 2009. Trading Silver for Gold: Asian Exports and the Political Economy of Currency Unions. Unpublished Working Paper prepared for the Asian Development Bank. Statistical Handbook of Japan. 2010. Trade, International Balance of Payments, and International Cooperation. Statistics Bureau, Japan. http://www.stat.go.jp/english/data/handbook/pdf/c11cont.pdf (accessed 19 Jan, 2011). Weisenthal, J. 2010. What Was The Plaza Accord, And What Does It Have To Do With Pressure On China To Revalue The Yuan? Business Insider. http://www.businessinsider.com/the-plaza-accord-2010-9 (accessed 19 Jan, 2011). World Data Bank. World Development Indicators and Global Development Finance http://databank.worldbank.org/ddp/home.do?Step=12&id=4&CNO=2 (accessed 19 Jan, 2011). Read More