The origin of the word Zen can be traced back to the Sanskrit word ‘dhyana’ meaning a meditative state. The Japanese Yen at the moment is nowhere near that state.
A week ago my wife messaged asking me as to why the value of a Japanese Yen was lower than the Indian rupee. The shock in her voice reverberated in the message. I got where her disbelief came from. Why does a first world country like Japan have a currency that is lower in value than the Indian Rupee?
The easy answer would be that since the Japanese only have one unit of currency one would need to think of the Yen as being equivalent to a penny/cent/paise and not a dollar or a rupee. This would explain as to why the Japanese have a 500 Yen coin, the highest value for a coin anywhere in the world (excluding Cuba).
But this does not explain the entire story. The Yen currently trades at 121 Yen to a Dollar (1 INR = 1.94 YEN). The question is, how did it get there?
History on steroids: From there to here?
The Yen for a large part of the latter half of the 19 century was fixed to the Silver standard and later moved to the Gold Standard. It was set at $0.23/yen when World War II began. After the war came to an end, wartime inflation caused the value of a Yen to fall to Y360 per $ (The US occupation government fixed this as per the Dodge plan– the spoils of victory?). Now a point to note was that during the war the Japanese underwent rapid industrial development, some numbers in context, machinery production increased by 252 percent. Machine gun factories were converted to sewing machine factories and retooled. The whole sector was able to take off post the war, building on just what was already accomplished. The new constitution also played a part since it forbade the country from rearmament, with the US guaranteeing its security. This created the fiscal space that enabled rapid growth.
Only when the tide is low do you see who all are swimming naked…the boom and the burst:
The stage was set for a massive increase in industrial production. Products manufactured in Japan were comparatively cheaper in the world market creating a current account surplus for Japan (exports greater than imports) which led to an increase in demand for Yen. By the 1970’s the fixed currency exchange rate was dropped in favor of a floating exchange rate which resulted in the Yen appreciating against the dollar. By the 1990’s, fueled by low interest rate a speculative bubble emerged and valuations skyrocketed. Interest rates were raised to curb this rise which in turn, burst the bubble. One could draw parallels to the 2008 American recession here.
The economy imploded and for nearly a decade Japan dealt with deflation. Consumers and companies did not spend, this fed into the cycle of zero growth. The government cut interest rates and increased the supply of money in order to kick-start the economy but the 90’s came to be known as the lost decade where growth stagnated.
One would assume with such a massive increase in public debt the currency would depreciate but with more than 90% of the debt financed by domestic savings the Yen did not sink. Investment income from assets abroad and a strong export market for Japanese products have ensured the current account remained surplus.
Subtract those two factors and you would get Zimbabwe, where the currency changes value by the hour.
From here, where?
Public debt is assumed to reach 230% of the GDP, the highest anywhere in the industrialized countries and with no sign of a sustained economic growth in sight.
With demand not playing sport in the domestic market the mantra in Japan is “export your way to growth”. A weaker currency then becomes the order of the day. With further increase in money supply and growing public debt, coupled with home grown companies manufacturing their products outside Japan, the pain for the Yen is about to grow. Will it sink? I do not think so, but once inflation (which currently is below the targeted rate) takes off it would be difficult for the genie to be sent back into the bottle. Until then the Japanese can sit tight and smile, their zen-like smile.
A week ago my wife messaged asking me as to why the value of a Japanese Yen was lower than the Indian rupee. The shock in her voice reverberated in the message. I got where her disbelief came from. Why does a first world country like Japan have a currency that is lower in value than the Indian Rupee?
The easy answer would be that since the Japanese only have one unit of currency one would need to think of the Yen as being equivalent to a penny/cent/paise and not a dollar or a rupee. This would explain as to why the Japanese have a 500 Yen coin, the highest value for a coin anywhere in the world (excluding Cuba).
But this does not explain the entire story. The Yen currently trades at 121 Yen to a Dollar (1 INR = 1.94 YEN). The question is, how did it get there?
History on steroids: From there to here?
The Yen for a large part of the latter half of the 19 century was fixed to the Silver standard and later moved to the Gold Standard. It was set at $0.23/yen when World War II began. After the war came to an end, wartime inflation caused the value of a Yen to fall to Y360 per $ (The US occupation government fixed this as per the Dodge plan– the spoils of victory?). Now a point to note was that during the war the Japanese underwent rapid industrial development, some numbers in context, machinery production increased by 252 percent. Machine gun factories were converted to sewing machine factories and retooled. The whole sector was able to take off post the war, building on just what was already accomplished. The new constitution also played a part since it forbade the country from rearmament, with the US guaranteeing its security. This created the fiscal space that enabled rapid growth.
Only when the tide is low do you see who all are swimming naked…the boom and the burst:
The stage was set for a massive increase in industrial production. Products manufactured in Japan were comparatively cheaper in the world market creating a current account surplus for Japan (exports greater than imports) which led to an increase in demand for Yen. By the 1970’s the fixed currency exchange rate was dropped in favor of a floating exchange rate which resulted in the Yen appreciating against the dollar. By the 1990’s, fueled by low interest rate a speculative bubble emerged and valuations skyrocketed. Interest rates were raised to curb this rise which in turn, burst the bubble. One could draw parallels to the 2008 American recession here.
The economy imploded and for nearly a decade Japan dealt with deflation. Consumers and companies did not spend, this fed into the cycle of zero growth. The government cut interest rates and increased the supply of money in order to kick-start the economy but the 90’s came to be known as the lost decade where growth stagnated.
One would assume with such a massive increase in public debt the currency would depreciate but with more than 90% of the debt financed by domestic savings the Yen did not sink. Investment income from assets abroad and a strong export market for Japanese products have ensured the current account remained surplus.
Subtract those two factors and you would get Zimbabwe, where the currency changes value by the hour.
From here, where?
Public debt is assumed to reach 230% of the GDP, the highest anywhere in the industrialized countries and with no sign of a sustained economic growth in sight.
With demand not playing sport in the domestic market the mantra in Japan is “export your way to growth”. A weaker currency then becomes the order of the day. With further increase in money supply and growing public debt, coupled with home grown companies manufacturing their products outside Japan, the pain for the Yen is about to grow. Will it sink? I do not think so, but once inflation (which currently is below the targeted rate) takes off it would be difficult for the genie to be sent back into the bottle. Until then the Japanese can sit tight and smile, their zen-like smile.