>From: "Seth Ackerman" <sia at nyc.rr.com>
>Subject: Re: Hangin' with Stanley
>Charles -
>This stuff is really interesting. But I'm a little >confused. You say
Japan's big problem is >the high yen. But the yen's been falling >against
the dollar for while now. How >overvalued is it, do you think - let's say
>based on PPP? Also, the cliche is that in >the 50's and 60's, the US
deliberately let >the yen stay undervalued for geopolitical >reasons. When
do you think that
>long-term policy ended?
The overall trend of the past three decades has been for the dollar to cheapen against the yen, there is no way to deny it. In 1975 one dollar was wroth 297 yen. In 2000 one dollar was 108 yen!
I'll start with your last question first. The official strong yen policy started back in the 1980s because the US said it would balance trade between the two countries (right, so would Toyota setting up Saturn showrooms so they could sell 300 per year). Later, as the Clintonites said: hell, if it takes one yen to the dollar that's what we'll do.
Using PPP, the yen should be somewhere like 150-160 yen to the dollar. For immediate reflation of the economy, probably something more like 200 yen to the dollar is called for.
>The Plaza accords? Hasn't the post-1995 >rise in the dollar cancelled out
the 1985-95 >weakening?
The key 'agreements' go back to 1985, when the US cheapened the dollar (and some say the strong yen then fed the bubble til the burst of 1989-90 and the incredible run up of the yen to 1994-5).
In 1985, the dollar was worth 238 yen. In 1988 it was worth 128 yen. In 1993 it was worth 103 yen. In 1995 it was worth 93
Interestingly, when the yen was allowed to slide from 1995-8, the economy picked up some and there was a little bit of growth.
Then in 1998-9 the yen strengthened from 131 to 114. In 2000 it reached 108 (this always makes me feel like a rich person when I do my US taxes, but then I have to go back to my reality in Japan and live like a regular person).
I don't have the rate for 2001 but I'm guessing something like 115-120.
So to answer your question, no, the recent slide hasn't compensated for much of anything, though it has Korea, China and SE Asia fuming.
>Wouldn't Paul Krugman's proposal of >deliberately creating inflation push
>down the yen? Then why does the BoJ >oppose it? What's their strategy?
Hey, I and quite a few others were saying this long before Krugman did. But it's the other way around. You manipulate the currency downard to create inflation.
I think he proposes just pegging the yen at a rate to create inflation--like 150 yen. Bad idea. Makes Japan the next Argentina.
Do you really think it's up to what the BoJ wants? Who controls the US dollar is the question you should ask (though I hope you know the answer).
There are those in the BoJ who have long wanted a cheaper yen because they knew it was crippling the economy. It wasn't just about exports, it was about what a deflationary economy does to any business's bottom line. THE US DID NOT WANT A CHEAPER YEN. IT WAS INTENTIONAL US POLICY TO CREATE A CHEAPER YEN WHILE NOT BACKING THE DOLLAR.
>You say the other Asian countries have bet >their economies on the US not
>allowing the yen to fall. What do you mean?
Because everyone knew what the official weak dollar vs. strong yen policy was. They knew it under Bush 1, they knew it under Clinton 1-2. Nor do any Asian countries hold large reserves of cash from their trade surpluses in anything but dollars.
When the yen was allowed to slide during that 1995-8 period, it had two effects that I know of: the economy in Japan started to pick up and some witless wonder of a currency trader in Singapore wiped out on futures bets (remember the Nick Leeson guy?). It's very interesting that the same thing happened recently in the US, another stooge for capital going over the deep end betting against a weakening yen, in the process wiping out some of the profits of that Irish bank (though you can bet with the profits that bank reports such gambling on currency movements is through and through a part of their culture--not the anomaly they'll claim it to be in the press).
Doesn't it make you wonder that despite all the lousy economic indicators and all the lousy loans reports, currency betters who think they are in the know just bet that a cheapening yen trend can't last? Why? Not economic fundamentals. It's because they know that mid to long term the US stand for it. The current quid pro quo would appear to be to let the yen slide to135-140 so long as Koizumi snaps to it for vulture capital to move on the 'bad loans'.
Charles Jannuzi