DEVALUATION OF JAPANESE YEN REASONS AND AFTER AFFECTS

ROLL NO. NAME

B-02 KAMLESH BHAGAT

B-24 VIPUL SANGLE

A-20 VINOD MAGAR

A-04 NISHANT BHATIA

OVERVIEW OF JAPAN ECONOMY

• The Economy of Japan is the third largest in the world by nominal GDP

•  The fourth largest by purchasing power parity and is the world's second largest developed economy According to the International Monetary Fund

• The country's per capita GDP (PPP) was at $36,899or the 22nd highest in 2013.

•  Japan is a member of Group of Eight The Japanese economy is forecasted by the Quarterly Tankan survey of business sentiment conducted by the Bank of Japan

• Japan is the world's third largest automobile manufacturing country, has the largest electronics goods industry,

• And is often ranked among the world's most innovative countries leading several measures of global patent filings Facing increasing competition from China and South Korea, manufacturing in Japan today

• Japan is the world's largest creditor nation generally running an annual trade surplus and having a considerable net international investment surplus. As of 2010, Japan possesses 13.7% of the world's private financial assets (the second largest in the world) at an estimated $14.6 trillion. As of 2013, 62 of the Fortune Global 500companies are based in Japan

REASONS FOR DEVALUATION OF YEN

• Japan has been in an economic funk since the 1990s  It was at that time that many speculated that they would overtake the U.S. as the global economic superpower, rather than China.  However, a poorly regulated financial system led to a housing crisis that they have yet to recover from.

• With the recent election of Shinzo Abe as Prime Minister and his appointment of Haruhiko Kuroda as governor of the Bank of Japan, they had embarked on an extremely aggressive approach that involved significantly devaluing their currency.

• It sounds odd that Japan would purposely devalue the yen, but it actually makes sense because they are highly dependent on exports.  Exports are goods that are produced in Japan but sold outside the country.

• Consumers value goods that are inexpensive, so that’s where the yen depreciation becomes beneficial.  When the value of yen declines relative to a foreign currency, then that means that good will be cheaper to foreigners.

• For instance, a weaker yen drives the price lower for a Nissan car, thus making it more attractive than a GM car to Americans.  This will lead to more Nissan cars being produced and less GM cars being produced.

 • Therefore, this has the effect of boosting auto

employment in Japan, but lowering auto employment in the U.S. Even though this is potentially damaging to the U.S. economy, it also makes Europe and developing countries even more vulnerable.

• While the U.S. has a strong internal economy and is not as dependent on exports, that is not the case for emerging countries in Asia, South America, and Africa, along with parts of Europe.  A weaker yen places more pressure on those countries because their goods are now more expensive. 

• They are faced with two unenviable options.  Either accept that their currency will rise and cause unemployment to rise or also devalue their currency and risk higher inflation.

• Theoretically, Japan is more able to absorb a weaker currency than most countries.  This is because their citizens historically have high saving rates.  Even though a weaker currency typically drives people to buy more goods and allow businesses to drive up prices, that might not be the case in Japan where they are frugal in their purchases. 

• This is one of the reasons why Japan has been plagued with deflation despite significant monetary and fiscal expansion.  On the other hand, they would benefit through increased employment opportunities when they see more of their goods being bought abroad.

• However, there is a downside with this strategy.  Bond investors are already leery about Japan’s excessive debt levels that actually dwarf the U.S The danger is that bond investors will flee Japan, which would drive their interest rates higher.  If this occurs, then that will make it more difficult for Japanese businesses to gain access to cheap credit and thus this would depress future economic growth.

• Even though these events are taking place across the Pacific, the ramifications of a weak yen are potentially huge.  It could lead to a currency war that can result in higher global inflation and create more economic turmoil worldwide.  A slow growing global economy means less opportunities for Americans, who are becoming more reliant on exports to increase employment and boost their standard of living.

China warns Japan on currency devaluation

• China has urged Japan to stick to its pledge of avoiding to suppress the value of its currency. China fears recent monetary actions by its Asian neighbor and other industrialized nations will hurt global growth

• As the yen continued sliding against the US dollar and other global currencies on Friday, China's Commerce Minister Chen Deming urged major governments to stop depreciating their currencies under efforts to boost their exports

• However, the leaders of the Group of 20 (G20) biggest industrialized and emerging economies agreed at a meeting in February to refrain from competitive devaluation, as well as to keep markets open and to resist protectionist measures

• At the time, emerging economies not only criticized Japan's monetary policy but also the United States Federal Reserve program of unlimited bond buying aimed at pumping money into the economy.

• In his latest message, Chen appealed to Japan, the US and other industrialized nations to stick to their anti-devaluation pledge.

• If efforts to drive down the values of major currencies were continuing, he said, this would deliver a huge shock to developing countries by depressing their exports.

Currency war in 2013• In mid January 2013, Japan's central bank signaled the intention to

launch an open ended bond buying programme which would likely devalue the yen. This resulted in short lived but intense period of alarm about the risk of a possible fresh round of currency war.

• Numerous senior central bankers and finance ministers issued public warnings, the first being Alexei Ulyukayev, the first deputy chairman at Russia's central bank.

• He was later joined by many others including Bahk Jae-wan, the finance minister for South Korea, and by Jens Weidmann, president of the Bundesbank Weidmann held the view that interventions during the 2009–11 period were not intense enough to count as competitive devaluation, but that a genuine currency war is now a real possibility.

•  • Japan's economy minister Akira Amari has said that the Bank of Japan's

bond buying programme is intended to combat deflation, and not to weaken the yen

• On 15 February, a statement issued from the G20 meeting of finance ministers and central bank governors in Moscow affirmed that Japan would not face high level international criticism for its planned monetary policy.

•  Paul Krugmanhas echoed Eichengreen's view that central bank's unconventional monetary policy is best understood as a shared concern to boost growth, not as currency war.

• Goldman Sachs strategist Kamakshya Trivedi has suggested that rising stock markets imply that market players generally agree that central bank's actions are best understood as monetary easing and not as competitive devaluation.