Can Japan Compete at Current Yen Levels? It’s Quite Plausible.
September 13, 2010
An article in today’s Financial Times by Mure Dickie and Lindsay Whipp questions whether yen intervention would be effective, let alone appropriate. Japanese exporters increasingly complain that it has become difficult to make a profit at present yen levels. At last week’s highs, the yen equaled 83.35 per dollar, 49.0% stronger than a low of 124.14 in June 2007, and 105.79 per euro, 60.7% more expensive than a low of 170 in July 2008. Nonetheless, Japan retains a solid current account surplus and has seen the adverse impact of yen appreciation mitigated by falling prices in Japan while prices were rising in the United States and elsewhere.
The article’s assertions can be verified and quantified. Japan indeed still runs chronic current account surpluses. That is one of the few economic features that remains a constant between now and when Japan was a powerhouse of economic growth. In only one calendar year since 1995 was the current account surplus smaller than 2.0% of GDP, that being 1.4% in 1996, and such was at least 3.0% or greater in six of the fifteen years. Moreover, Japan’s current account surplus trend has been upward, averaging 2.3% of GDP in the five years to 1999, 2.9% of GDP in the five years to 2004, and 3.7% in the five years to 2009. The surplus in the first half of this year of 3.5% of GDP was exceeded only by ratios of 4.8% in 2007, 3.9% in 2006, 3.7% in 2004, and 3.6% in 2005.
1995 was the last time when the dollar was as weak against the euro as it is presently. The greenback’s average value in July 1995 was 87.39, 1.1% above its July 2010 mean value. Over the fifteen intervening years, consumer prices rose 42.6% in the United States but fell by 1.3% in Japan. To reset the dollar’s purchasing power in July 2010 to what such was in July 1995, yen should have advanced 44.4% instead of just 1.1%.
One might alternatively wish to use July 1997 as a benchmark date of reference, since that was when the Asian crisis began and when it became apparent that domestic deflation was taking root. Unlike July 1995, the yen was considerably weaker in July 1997 than now, with an average dollar value for the month of 115.27. Over the thirteen years between July 1997 and July 2000, consumer prices fell 3.4% on net in Japan but climbed 35.7% in the United States, and it would have taken a 40.6% appreciation of the yen against the dollar to offset the disparity in U.S. and Japan. Otherwise, U.S. exports converted into yen would cost more now than then relative to competing Japanese goods. The yen’s rise between July 1997 and July 2010, however, was 33.3%.
It does indeed appear that the complaints about competitiveness by Japanese businesses overstate the real pain that they are feeling. The yen is in fact weaker than in the mid-1990s when adjusted for differences in domestic inflation, and Japan’s current account surplus is larger now than then. Other governments will not agree to intervene along with Japan to weaken the yen. Unilateral intervention is still possible. As Dickie and Whipp note, the contenders for Prime Minister in a vote tomorrow of Democratic Party legislators both attach high importance to resisting yen appreciation and have insinuated that policy changes including intervention may occur soon if the market doesn’t turn on its own.
Unilateral intervention, even if sterilized to avoid any lasting effect on monetary growth, has a reputation of ineffectiveness that is somewhat undeserving. Sometimes, such does fail — for example, the Swiss efforts to halt Swissy advances earlier this year. However, there have also been instances when unilateral intervention appears to have mitigated the amplitude of foreign exchange swings, but those moments of success generally coincided with times when prior currency movements had become excessive and no longer justifiable. That does not seem to be the case with the yen at the moment.
Copyright 2010 Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: current account, Japan, overvalued yen
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[…] Adjusted for inflation, the yen had not seemed pricey. See my September 13 posting on Japanese competitiveness. […]