2010 September 06 Monday
Yen Surge Against Dollar Due To Trade Deficit?
Tokyo-based Bloomberg News columnist William Pesek says a most amazing thing.
Trade surplus aside, there's little economic justification for the yen's 28 percent jump against the dollar since Sept. 1, 2008.
Trade surplus aside. Suddenly I'm thinking "Huge rocket engines rapidly burning huge amounts of fuel producing massive thrust aside, there's little reason why the Apollo rocket should have put the Command Module on a course for the Moon".
The most amazing thing here is not the dollar decline. No, what amazes is that trade surpluses could go on for so long without currency rate adjustments big enough to bring trade back into balance. Maybe Pesek is so used to watching exchange rates that seem unaffected by the trade deficit that he sees no reason the past can't continue. But as Herbert Stein famously put it: "If something cannot go on forever, it will stop." The US trade deficit with Japan can not go on forever. Maybe we are nearing the point where it will stop.
There are deep reasons why the US trade deficit is not quickly causing the dollar to lose its value as fast as it is expected to do: the US is the only country that allows foreigners to use their surplus dollars to buy land, businesses, and even people on American soil. Other major countries would not allow foreigners to gain control of the country, regardless of how much money is involved. If Japan were to pay the Saudis with yens instead of dollars, then the only thing the Saudis can use the Japanese currency is to buy manufactured goods from Japan, the Saudis would not be able to buy a significant piece of Japan. Thus the politics would put a limit on how valuable the Japanese currency will become, regardless of its surplus. In fact, the fact that the US dollar is so effective for buying raw materials (due to its high value that refuses to go down), many exporting nations feel obliged to obtain US dollars initially by exporting to the America, in order to import raw materials for their own countries by exporting more goods to the raw materials producing countries.
It is not clear how long this situation will last, i.e. how long the raw materials countries will continue to trust the US dollar more than the currencies of manufacturing countries. At some point, the US will not be able to pay its debt to foreigners and if this happens, it is not clear who will benefit more.
The USD as reserve currency of the world seems to me to be the cause of the imbalance not self correcting. If trade were conducted in a precious metal, then once the metal ran out the imbalance would automatically correct. Correct me if I am wrong.
not only that, but the boom years plus quantitative easing allowed Japan to have somewhat positive inflation during 2003/2008. Once the crisis hit, Japan went quickly back to deflation
This led real interest rates in Japan to soar, almost matching US levels. So the Yen in pressured to appreciate both by the trade surplus and the capital account.
Markets bought the mantra "the only Japan can grow is through exchange rate devaluation" and ignored that with negative population growth Japan gets wealthier on a per capita basis even if its economy stays flat.