By on July 7, 2010

There was a time, in summer of 2007, when a dollar bought more than 120 yen. Once you arrived in Tokyo, you quickly wished it would have bought more. Now, the dollar buys about a third less. The dollar/yen rate had been at a downward trajectory since that summer of 2007. What made the yen really expensive was a company called Lehman Brothers, and the fallout following their bankruptcy in 2008. For inexplicable reasons, the yen is seen as a safer currency than the greenback. Should you make the mistake of stepping off the plane with Euros in your pocket, you would be in for an even bigger shock. In July 2008, a Euro bought 170 yen. Now, it’s down to 109.  For even more inexplicable reasons, some mentally unstable people still talk about an undervalued yen.

You may not travel to Tokyo frequently enough to give a hoot. But Japanese auto manufacturers don’t want to take it any more.

The chairman of the Japan Auto Manufacturers Association (JAMA) said today he hopes the Japanese government will lend a hand to reel-in the strengthening yen, reports The Nikkei [sub]. “If the yen’s strength continues, there will be a negative impact on Japan’s economy,” said Toshiyuki Shiga. “If there are any steps the government could take, then we would like to ask for such measures,” said the chairman, who is also COO of Nissan.

A strong yen makes exported cars more expensive (or less profitable,) and it diminishes overseas profits when they are consolidated into the books back home. About half of the vehicles produced in Japan are usually exported. Japanese automakers currently enjoy a rising domestic demand. But they are worried about a German-sized hangover once the government subsidies expire later this year.

Japan could use what Europe has: A soft currency. In the first six months of 2010, German car sales were down 29 percent. In the same period, the German auto industry produced 23 percent more cars than in the first half of 2009. Why? Strong exports, driven by a soft Euro. (Why doesn’t anybody complain about an undervalued Euro? I could use some Euro value. Help me out.)

In the “if there are any steps the government could take” department, there is only so much a government can do. The yen is freely traded. The Prime Rate in Japan stands at an all-time low of 1.45 percent. No room for play there.

There is another government in play: The Chinese. The Wall Street Journal reports that China “has significantly increased its purchases of Japanese government bonds in recent months.” This most likely intensified in the past week after China relaxed the Yuan/USD peg. That vilified peg had forced the Chinese to buy dollars to maintain the peg. With the peg relaxed (as requested umpteenth times by U.S. government figures and lawmakers) there is less reason for Chinese dollar buying. That money now can go to Tokyo, driving up the yen even more.

If the world market thinks a country with a deficit of 227 percent of GDP is a safer place to park your money at next to no interest, then this should give us pause to think.

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25 Comments on “Japanese Car Makers Worried About Sumo-Sized Yen...”


  • avatar
    Invisible

    some mentally instable people still talk about an undervalued yen.

    Are you referring to the UAW war cry….. LOL.

    • 0 avatar
      Invisible

      LOL, and as predictable as the sun coming up. Agent009 and UAW_Lax are doing the very thing TTAC predicted. Claiming manipulation/cheating the system, etc..

      “…….For even more inexplicable reasons, some mentally unstable people still talk about an undervalued yen……”

      Hey UAW_LAX, the author knows you well.

  • avatar
    NN

    I believe…and may be wrong…that the yen, as Asia’s most freely traded currency, is buoyed by the Japanese economy’s exposure to growth throughout Asia (specifically China). Japan I believe has a significant trade surplus with China. Maybe the banks and currency traders see some safety there, since they can’t freely trade the yuan.

    I’m heading to Asia this fall (Hong Kong, China, Seoul and Tokyo) on 1/2 business and 1/2 pleasure…and looking forward to my first visit to Tokyo, save for the expenses. As I’m traveling solo, I guess it will be a cube hotel for me.

    • 0 avatar
      L'avventura

      NN, “safety” is the key word. The yen right now is the ‘safe’ currency, which is why the yen raises when the economic problems in Europe and US are apparent. Much to the chagrin of Japanese exporters.

      Part of the reason is because Japan’s financial system was largely spared from the recent economic meltdown, due to history of Japan’s own meltdown. But there is more to it then that…

      We’ve seen a massive diversification of government currency reserve around the world. Until now, foreign governments primarily held currency in the dollar, however its steady decline coupled with the financial mess has shifted currency elsewhere. The second highly held currency was with the Euro, however confidence in the Euro has crumbled with Europe’s sovereign debt crisis.

      …so now, governments and global investors are holding more currency outside the dollar and the euro to hedge its risk. The yen has been the main alternative currency that which they have flocked to.

      However, there is another element to this…

      Since the 80s and 90s, the main pillar of support for the dollar has been the Japanese buying US Treasuries, in the last decade or so the Chinese have stepped in to supplement the purchase of US debt. This is changing, which has lead the weakening of the dollar.

      Folks at Yale have a good article on it:
      http://yaleglobal.yale.edu/content/will-japan-finally-get-cabinet-makes-policy

      “But the upward pressure on the yen is no longer something that Japanese business believes must be stopped at all costs. The fact that Japanese-owned dollars circulating in the American economy no longer guarantee American purchases in Japan has prompted a rethinking of priorities in the higher reaches of the Japanese business community.”

      We are rapidly evolving from a mindset of the ‘dollar as king’ to one of more currency diversification. As China loosens its restriction on the Yuan, we should see a massive influx of holding Chinese currency. Which is also why whole Yuan issue is such a big deal.

  • avatar
    Stingray

    “However, if the world market thinks a country with a deficit of 227 percent of GDP is a safer place to park your money at next to no interest, then this should give us pause to think”

    Whiskey Tango Foxtrot? Please tell me I read it bad: 227% of GDP?

    Did Gozdilla cave the recipient for such red ink madness?

    • 0 avatar
      50merc

      I think Bertel was referring to outstanding government debt, not the annual deficit.

      The looming problem is what happens when interest rates go up. The US has been financing much of its deficits with short-term debt. Higher interest rates would have a quick and substantial impact on budgets.

    • 0 avatar

      According to AFP, “Japan has a fiscal deficit that stands at a whopping 227 percent of gross domestic product, the highest level in the G20.”

    • 0 avatar
      Stingray

      That is insane. How does a country lives with such deficit?

    • 0 avatar
      BDB

      @Stingray–

      Because like the US they can borrow very, very cheaply. This is why unemployment should be the #1 concern, not debt (a log term problem) or inflation (a non-existent one).

    • 0 avatar
      L'avventura

      “”If the world market thinks a country with a deficit of 227 percent of GDP is a safer place to park your money at next to no interest, then this should give us pause to think.”

      Bertel, I think you mean “debt’ not ‘deficit’. Two totally different things. Your figure is referring to Japan’s gross public debt.

      Now, I’ll tell you why that comment is completely wrong from an economics perspective:

      #1) Japan is a net-lender.

      Japan still lends more money then it borrows, and has a good deal of solvency due to the debt they own. Japan doesn’t need to sell bonds to cover its spending. And when it chooses to issue bonds, it doesn’t need to sell them to foreign central banks.

      #2) Japan owes money to themselves.

      Meaning that their debt is not held in a foreign currency nor owed to foreign entities (which was the problem with the Greece, Spain, and Iceland). If you look at Japan’s ‘net debt’, which measures gross debt minus government assets such as public pension fund reserves and foreign reserves its relatively low. In fact, Japan has almost no foreign currency-denominated debt obligations.

      #3) JGB bonds.

      The Japanese government is effectively the only borrower in Japan, and raises all of the money it needs from the savings of its own citizens. The Japanese government has miraculously convinced their own citizens to put their savings into government bonds that yield almost zero interest which has been purchased through, until recently, a nationalized Post office.

      Now the fear is that as the population ages, these savings will be drawn out. However, these bonds, being owned by its own citizens will be drawn out in yen; not dollars, euros, or yuan. Japan being a deflationary economy with an overly-strong export-dependent currency has much more flexibility with the quantitative easing (QE).

      … So why is this 200% figure being talked about? you say.

      Politics. PM Naoto Kan is using these debt figures for new taxes, particularly VAT. Debt-to-GDP ratio as a measure of economic health is a poor one that ignores the important variables. The market didn’t even flinch when he said raised concerns of Japan’s debt. However, an austerity plan is important, reckless spending and new debt is a danger. But Japan’s current debt is not an issue has some in press make it out to be.

  • avatar
    ttacfan

    It was approaching 200% in the March of this year: http://www.businessweek.com/news/2010-03-23/japan-may-target-debt-to-gdp-reduction-sengoku-says-update1-.html

    Yet they spend only 2% of GDP paying interest on that debt.

  • avatar
    Invisible

    It appears on mentally unstable person is falling for it at another website. Agent009 has copied and pasted this article, and proceeded to proclaim the Japanese are manipulating their currency again.

    • 0 avatar
      mikey

      Feel free to call me mentally chalenged, I’m not sure about the unstable part.

      Answer me this. Isn’t “currency manipulation” exactly what the Japanese car companies are asking thier government to do?

    • 0 avatar

      A central bank has certain interventionalist tools at their disposal. None count as “currency manipulation” (or would you brand the Federal Reserve as “currency manipulators?”)

      - They can buy or sell their own currency. Selling it lowers the price, for a while. Usually a short-lived measure. Works best if there are big speculative positions, which get wiped out due to central bank intervention
      - They can raise or lower the interest rate. Raising the rate theoretically makes the currency more attractive, thereby increasing the value. Lowering the rate does the opposite. Theoretically. Doesn’t always work. See Japan.
      - They can print more money. Usually drives the value down. Doesn’t always work. See USA.
      - They can make policy announcements. Greenspan was a master of them

      None of the above counts as “manipulation.” Of course, one man’s intervention is the other man’s manipulation.

    • 0 avatar
      Invisible

      Mikey, who r u? Would you be the insecure Agent009?

    • 0 avatar
      L'avventura

      Bertel, it depends on where you are and who you are.

      If you’re in the EU much of what you have described is illegal under the Maastricht Treaty.

      The other extreme example is China…

      But you hit the nail on the head:
      “one man’s intervention is the other man’s manipulation.”

      Its ‘currency manipulation’ when you do it, but not when I do it…

  • avatar
    Chicago Dude

    I am inclined to believe that the strengthening of the Yen is still mostly caused by the continued unwinding of the carry trade.

    As Bertel alluded to via Lehman Brothers, for quite a long time traders were selling Yen-denominated bonds short and converting the proceeds to other currencies such as the US dollar (which pushes the Yen down and the dollar up) and then buying government bonds in that currency. You earn money by pocketing the difference between the interest rate you pay on the Yen-denominated bond (you pay because you sold it short) and the interest rate you collect on the US dollar government bond.

    The yield difference between US government debt and Japanese government debt is currently so low that nobody is interested in doing such a trade any more. Earlier this year the big thing was the Yen vs the Australian dollar, but that seems to have gone away too.

  • avatar
    cmoibenlepro

    –In the “if there are any steps the government could take” department, there is only so much a government can do. The yen is freely traded. The Prime Rate in Japan stands at an all-time low of 1.45 percent. No room for play there. –

    Well… Japan could simply increase the Money Supply, by accelerating the money printing machines (like the Fed is currently doing).

    Of course the Yen is freely traded, but if Japan increases supply then prices decrease. This is called demand and supply theory, economics 101.

    I don’t know why they don’t do this; they have been in deflation for the last decade…

    • 0 avatar
      BDB

      And just like the fed, they’d probably fail. There’s too much deflation going on right now.

      The Fed has printed loads of money and the value of the dollar is STILL rising, that’s how much of a deflationary hole there is to fill!

  • avatar
    John Horner

    Just like the 1990s all over again. Back then I frequently traveled to Japan and the Yen traded at around 90-100 to the $US.

    Purchasing power wise, the Yen would need to be at around 200 to the dollar for rough parity. Very different from the Yuan/Dollar situation.

  • avatar
    cardeveloper

    If you include all the off book U.S. Govt spending, we make Greece look like a well managed govt. If you further pull forward all the future obligations, it’s so ridiculous, there is no reasonable way out.

    Gets even better when you consider the GDP is artificially manipulated, upward of course.

    • 0 avatar
      BDB

      The markets disagree. People are buying U.S. Treasuries in droves, which is a vote of confidence in ability to pay future obligations.

      If you look at debt to GDP ratio we’re better off than any developed country save Canada, and that’s mostly because Canada didn’t have the housing bubble/mortgage meltdown to the same extend we did here.

      Greece was (1) unable to collect taxes, tax evasion is rampant in that culture, and (2) didn’t control its own currency.


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