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Home > Media Reiews > News Review Last Updated: 14:52 03/09/2007
News Review #100: January 30, 2003

Selling currency is not the solution, Hayami says

Reviewed By Hitoshi URABE

"Selling currency is not the solution, Hayami says"
(by Kanako Chiba and Mayumi Otsuma, Bloomberg News) International Herald Tribune


The clamor for lower yen became even noisier in early December when the yen began to hike against the dollar. It was feared that the higher yen would cripple the exports that had begun to pick up, which carried the hope that it might help bring back the depressed economy. Indeed, many were wishing the exports to function as a locomotive to pull Japan's economy out from the pit.

Last week the trade figures for 2002 were released, which showed that the trade surplus had increased by 51.3% over the year before, making it the first time to see an increase of surplus since 1998. The exports increased by 6.4 percent and imports decreased by 0.6 percent from 2001. Economists have commented that this indicates it is necessary for Japan to rely its recovery on foreign demand, for even with this increase in exports the economy was dwindling. Many point out that it would need Japan to further enhance exports in order to bring back its economy to shape.

Exports, or external demand, by definition, increases production. And, in order to sell well the prices need to be competitive. Therefore, a lower exchange rate is preferable as it lowers the prices of exports. This is a logic formulated centuries ago, and was put in practice by many industrialized countries in 19th century and into the middle of 20th century.

Recently there are those who do not subscribe to this conventional theory, however. Historical analyses have been presented where the value of yen to other currencies does not seem to support the concept. These data show that fluctuations of economy and exchange rate do not coincide, and could not conclude that the low yen would bring about a favorable economy.

From the microeconomic point of view, it has been recognized that through decades of unpleasant experiences, industries and merchants have found ways to cover foreign exchange risks and become invulnerable against exchange rate fluctuations, through such instruments as forward contracts, futures, options, and more elaborate means. These protection measures work in both directions, and accordingly, it is considered that the effect of exchange rate would be very limited at most to alter the trend of trade, especially in a short period of time.

Political ramifications of exchange rate policies must be assessed carefully also. Three-quarters of a century ago, many countries, in an effort to stimulate their economies through enhancing exports, resorted to exchange rate manipulations. They deliberately lowered their currency values against those of other countries. Then it soon became a competition in devaluation of exchange rates, later dubbed as the "exchange rate war," which in effect was a selfish policy to gain a little for themselves at the cost of others. It was later condemned as one of the major causes of WWII. Manipulation of exchange rate could act as a vicious weapon on other economies, intended or not, and could lead to grave consequences.

Nevertheless, perhaps there is no need for concern. Foreign exchange market has since grown so huge that literally no one is able to dictate its levels, or even a vague direction, to his wish. The fact has frustrated practically every policy maker in the world for the past three decades. At times the market, as if with its own will, bared its fangs and attacked various economies brutally. However, perhaps this seemingly autonomous character of the market could also be the strength to withstand maneuvering efforts by those pursuing egotistic and often unwarranted interests.

Not to say that those who wish for lower yen to assist economic recovery are selfish, but attempts to direct the market in their own interest should prove futile, in theory, in experience, and in practice.

Copyright © Japanese Institute of Global Communications