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Why Weaken the Japanese Yen? The Conflicting Claims of Economics

From Thursday's NewsHour:

"The Japanese yen settled near record highs against the U.S. dollar today, which make Japanese exports more expensive. Banks and finance ministers of the G7 are considering measures to decrease its value in order to help with Japan's recovery."

This response from Pody Vanmun, under the headline, "Finance always seems backwards:"

It seems that it would be good that the yen is high when they need to re-build a damaged country and they have no resources; because they could then buy abroad what they need, relatively cheaply for them.

But the G7 wants to devalue the yen so that the Japanese can sell more at a time when their industry may have slacked due to damage and redirection of national effort.

Not "backwards," Ms. Vanmun; just tugged in different directions. And it's not really finance or economics we're talking about, but financial and economic policy.

Photo of Japanese yen by Flickr user [Jim]

Humans react dramatically to dramatic events. Makes sense. But it can cause collateral damage. Better to leave a burning airplane in an orderly fashion, especially for those at the end of the line. Understandable, though, when they try to claw their way over their cabin mates to get to the door.

Japanese investors searched for an obvious reason: "We'll need yen immediately," they thought, "so we'd better sell off our foreign assets and stock up on the local currency." But like any other good, when a currency suddenly finds itself in great demand, its price tends to spurt. For an island economy like Japan's, heavily dependent on selling things to the rest of the world, a rise in the value of its currency is a rise in the price of what it sells. That in turn threatens its companies and thus its jobs.

Yes, you're certainly right: a stronger currency makes imports cheaper. As an island economy, Japan has long relied on importing calories from abroad, mainly in the form of food and fossil fuels. (Pearl Harbor was in fact triggered by the U.S. denial of oil to Japan, a denial triggered by Japan's invasion of China, an invasion triggered in part by Japan's desire for nearby raw materials.)

But if Japan's companies go under and take the stock market with them, what then? Where's the income to rebuild, or even keep going? What happens to the yen in such circumstances?

Note the similarity to China. It can allow its currency to strengthen, enabling its people to afford more. But were it to do so, China fears, revaluation would kill the goose responsible for 30-plus years of glittering eggs.

-- Posted March 21, 2011 | Comments ( ) | Permalink