Thursday, March 28, 2013

the yen and its value

I have always had a rough time getting excited about investing in Japan because of the unstable ground beneath the country, the problem did appear as an issue when the tsunami hit in march of 2011. A question may be arising recently as to the financial stability of the yen and the country's markets. Since the middle of November Prime Minister Shinzo Abe, then running for office, began a campaign to talk down the value of Japan’s currency to revive the nation’s export-led economy.

Many finance ministers in developing economies from Russia to Thailand say the world is plunging into a currency war. This time around it’s not the U.S. that’s taking the heat, nor is it China, It’s Japan. The first deputy chairman of Russia’s central bank, warned on January 16th that “Japan is weakening the yen, and other countries may follow”.  On January 22nd, the Bank of Japan set a new 2 percent annual inflation target and pledged to expand its purchases of bonds and other assets next year to reach its goal. Both moves are likely to weaken the yen further in the long run, thus other governments are more alarmed than before.

Prime Minister Shinzo Abe is urging the Bank of Japan to buy foreign bonds for the purpose of lowering the yen’s value. An Abe adviser, told reporters on January 20th that policymakers are working hard to raise prices and create a little inflation within Japan and influence the yen. But, he added, “if it goes too far, it should be stopped.” As a way to drive the yen lower many different tricks have been used, remember you can always lower the value of your currency. Japan has bought over a half trillion dollars of US bonds and bad Euro debt over the last two weeks.

A spokesman for German Chancellor Angela Merkel’s party said on January 22nd that Japan’s actions risked retaliation by other Group of 20 nations. Critics call it a, "beggar-thy-neighbor policy" because trade is a zero-sum game: If one country racks up bigger surpluses, another must run bigger deficits. Competitive devaluation is even blamed by some economists for contributing to the Great Depression. It’s popular to blame countries with falling currencies for hurting their neighbors, but the reality is more complex.  

 Recently Ford CEO Alen Mulally said he’s concerned that the depreciation of the yen is bolstering the competitiveness of Japanese car makers. “The most important thing that most countries around the world believe in is letting the markets determine the currency,” Mulally said today from Bangkok in reference to the Japanese currency, during an interview on Bloomberg Television as stated, the yen has fallen about 15 percent against the dollar since mid-November.

This has bolstered shares of Toyota and Honda Motor Co. as well as the Japanese market as a whole. The yen’s slide increases profit for Japanese automakers when they sell vehicles outside their home market, helping them to cut prices, boost advertising and improve products. The American Automotive Policy Council, backed by Ford, General Motors Co. and Chrysler Group LLC, estimates that the currency advantage equates to about $5,700 per vehicle, this is a huge advantage.

FOOTNOTE; This article dovetails with a previous post about currency trading and dangers related to it.


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