The many faces of the yen

Early last week, Japan’s central bank carried out an initiative to effectively devalue the Japanese yen. This move comes at a surprise given the yen’s performance, hitting a fifteen year high at 82 yen per USD.

While a strong currency is favoured by many nations, lowering the value of the yen could mean a greater success selling Japanese goods abroad, a fundamental element in Japan’s export-oriented economy. “The publicly stated concern is that if the currency becomes too valuable, it becomes too difficult for Japanese exporters [to operate],” explained Derek Hall, political science professor at Wilfrid Laurier University.

Japan moved to sell its currency against the dollar on Sept. 15, effectively pushing the price of the yen down. However, this hasn’t been the first time Japan’s economy has been subjected to reinvention. What came to be known as “the miracle” in Japan, an era of 10 per cent growth per annum, slowly slumped into the “lost decade,” a period of negligible growth in the 1990s. This was largely attributed to a wide degree of over-investment in the 1980s. Echoes of economic intervention ring out from the Plaza Accord in 1985. The United States devalued their dollar in comparison to the German deutschmark and the Japanese yen. “The Plaza Accord succeeded but the effects were much more dramatic than anticipated or desired,” said Hall. The initial goal indicated that the yen would grow by 10 per cent against the dollar. Instead, the yen doubled its value. “It totally overshoots what they were aiming for,” Hall added.

Many attribute the Plaza Accord to be one of the catalysts for the “lost decade” which occurred shortly thereafter. With this in recent memory, many approach Japanese economic intervention with reservation.

“Those who recently have been pointing to the Plaza Accord… include the Chinese government and Chinese economists because they’re facing the same pressure from the Americans to revalue their own currency as the Japanese had before them” added Hall. Given Japan’s turbulent economic history throughout the 1980s and 1990s, it is understandable that China has voiced their concern.

Despite Japan’s decisions in economic policy however, the move carries heavy political repercussions with is as well. By setting their own market value for the yen, Japan upsets explicit financial boundaries imposed by the Group of Seven (G7), an initiative which was accepted due to Japanese influence.

The G7 nations jointly agreed to support economies based on floating exchange rates, a system which allows foreign investment and market trends to determine the value of a currency. Furthermore, the Japanese model reminded emerging markets such as Brazil or China that economies based on export can be sustained by allowing floating exchange rates to take their course.

However, Japan’s move upsets a carefully orchestrated initiative to help spread out demand evenly across the G20 nations and sets a dangerous precedent for many nations who are contemplating devaluing their own currency. “With the financial crisis having just occurred, there is an unusually high level of concern that countries will start doing this,” Hall concluded.

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