The yen does not just go in one direction. It was going down for quite awhile in recent years.
The larger truth is that there tend to be pronounced short-run trends in currency values that go on for some time. These trends have very little to do with "fundamentals" but look more like speculative bubbles. There are very long run trends in currency values that do, more or less, reflect fundamentals, but they only operate over very long periods of time.
Thus, the usual story on long run currency fundamentals is the purchasing power parity (PPP) equilibrium which reflects both productivity and inflation in respective countries. Countries with long run strong productivity growth and low inflation will tend to have stronger currencies. And one sees this between the major economies over, say, the last 50 years. But the best estimates suggest that the reversion toward the PPP equilibrium is at about a rate of 15% per year. That's not much and is easily overwhelmed by much shorter phenomena such as interest rates that can strongly influence capital movements which easily swamp the trade related movements.
Indeed, even with interest rates things can be all screwy. The usual story is that an increase in interest rates will push a currency up. I certainly tell my students that as do all professional economists who teach. But does this hold in the real world? Frequently not. Thus, last fall, when the Fed cut US interest rates the $ rose and several years ago when the Fed raised them the $ fell (I believe that Doug H. and I duked it out back then about this matter). Anyway, an explanation involves expectations. Falling interest rates imply a strong economy and also rising asset prices. So foreigners pump money into your stock market. Rising interest rates damage asset values and foreigners take their money out, just as the Japanese appear to be doing today with US interest rates on the uptick while interest rates are about zero in Japan (yes, real interest rates are pretty high with deflation going on).
Plus, indeed, there are a host of studies going back to the beginning of the floating rate regime in the early 70s showing the existence of these long trends. A biggie was in the early 80s when the $ rose, and then turned around and fell for several years. Long swings (not at the Kondratiev frequency, however) are the rule, not the exception in forex markets.
Ironically, the current decline of the $ looks like a sudden focusing on the long-run equilibrium side of things. The US is running this humongous and getting ever more humongous trade deficit. This is what is supposed to drive the PPP fundamental, although it appears to be less of a matter of prices in the US being too high rather than that US citizens are rich and spending all they earn to buy imports compared to the rest of the world. Anyway, a falling $ will tend to shut that off and encourage foreigners to buy our goods rather than our assets. Barkley Rosser -----Original Message----- From: Seth Ackerman <SAckerman at FAIR.org> To: 'lbo-talk at lists.panix.com' <lbo-talk at lists.panix.com> Date: Thursday, September 23, 1999 3:20 PM Subject: RE: Americanization of global finance (cont.)
>Doug Henwood wrote:
>
>> Seth Ackerman wrote:
>>
>> >But why does the the yen keep appreciating? The Ronald MacKinnon
>> >article from the Economist that I posted claimed it is due to
"unresolved
>> >trade disputes" which struck me as being somewhat vague.
>> >
>> > Anyone have any ideas?
>>
>> Capital inflows, I'm guessing. Japanese investors repatriating and
>> foreign investors trying to play the "recovery."
>>
>>
>>
> But MacKinnon had a chart showing that this has been going on for 20
>years. Remember last year when the dollar dropped like 20 percent in one
>day? That was before any signs of recocery in Japan. The yen seems to go in
>only one direction.
>
> Seth
>