Are the Japanese the latest victims of a strengthening currency?

The Japanese Yen has hit an eight month high vs the US Dollar according to BBC news BBC News Article. This has prompted a lot of hand wringing from the Japanese ruling party and has sent share prices in Tokyo tumbling. But why should having a strong currency against the greenback equate to economic turmoil?

The Japanese economy is in a precarious situation right now. Forecasters were starting to talk about better GDP growth figures for the East Asian nation after the economic downturn of recent times. However, higher value Yen will see exports to the USA seem less competitive. Japan relies heavily on exports for growth and the USA is a key market. The appreciating Yen is yet another blow to Japanese exporters to the USA after recession-induced falling demand from US consumers and ‘buy American’ campaigns had already weakened the once healthy sector and with many commentators pointing to further gains as a result of Ben Bernanke’s loose Federal Reserve monetary policies there are fears this could be a long-run position.

The high of 88.23 Yen per dollar has seen share prices of large Japanese manufacturers tumble as investors anticipate falling profits for the likes of car-maker Honda and consumer-electronics giant Sony.

Finance minister Hirohisa Fuji now faces a dilemma. He will face pressure to take action in the currency markets and dump large amounts of Yen to boost supply and force the price down. There are clear benefits to such a policy. Domestic industries would see US orders bolstered and employment levels should be maintained. However, imports will become more expensive for Japanese consumers, adding to inflationary pressures when rising demand and interest rates hovering around zero could be a recipe for inflation.

This article highlights many concepts and issues for the Economics student such as exchange rate fluctuations and how they alter trade patterns, the merits of devaluation as a tool of government economic policy and the perennial problem of chasing high growth levels whilst keeping inflation under control. Mr Fuji has to evaluate all of the ramifications of a devaluation of the Yen, the possible resultant inflation and the impact of such a policy on all of the stakeholders in the Japanese economy and take a tough decision. What would you do in his situation?

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