Currency fluctuations affect different populations in different ways. Consider the recent decline of the yen, which slid from around ¥103 against the U.S. dollar
DX00,
-0.04%
DXY
at the end of 2020 to a multi-decade low of around ¥151 in late 2023. The weak yen
USDJPY,
-0.07%
has forced some of my economist friends in Japan to cancel their research trips to the United States because their grants now fall far short of travel expenses. On the other hand, Japan’s tourism sector is booming, as a trip to Tokyo has become a bargain.
This raises the question of whether a local currency’s appreciation or depreciation is more desirable for boosting macroeconomic performance. In the case of Japan, an archipelago that is heavily dependent on trade, a stronger yen could be beneficial, because the terms of trade usually improve as the currency’s value rises. The same volume of exports would translate into more imports. But when a country earns substantial revenues from overseas investment, a weaker local currency increases consumption opportunities. For example, the Government Office of Japan estimates that the country’s gross national income (GNI) was 6% higher than its GDP in July 2023, largely owing to a cheap yen. This indicates that Japanese who receive more income from foreign investment now enjoy greater purchasing power. More importantly, a weak local currency creates a moderately inflationary environment that promotes growth — what the late economist Arthur Okun and, more recently, U.S. Treasury Secretary Janet Yellen have called a “high-pressure economy.” Such an economy generates more employment opportunities and facilitates technical progress, partly by ensuring that resources are allocated quickly and efficiently. By contrast, during a recession, people are less willing to change jobs or to innovate. Japan’s post-World War II economy exemplifies this dynamic. The yen’s dollar exchange rate was originally fixed at ¥360 and, even after shifting to a floating exchange rate in 1973, remained low until the mid-1980s. Dale Jorgenson and Koji Nomura found that, as a result of the yen’s relative weakness, the average cost of production was generally lower in Ja …
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DX00,
-0.04%
DXY
at the end of 2020 to a multi-decade low of around ¥151 in late 2023. The weak yen
USDJPY,
-0.07%
has forced some of my economist friends in Japan to cancel their research trips to the United States because their grants now fall far short of travel expenses. On the other hand, Japan’s tourism sector is booming, as a trip to Tokyo has become a bargain.
This raises the question of whether a local currency’s appreciation or depreciation is more desirable for boosting macroeconomic performance. In the case of Japan, an archipelago that is heavily dependent on trade, a stronger yen could be beneficial, because the terms of trade usually improve as the currency’s value rises. The same volume of exports would translate into more imports. But when a country earns substantial revenues from overseas investment, a weaker local currency increases consumption opportunities. For example, the Government Office of Japan estimates that the country’s gross national income (GNI) was 6% higher than its GDP in July 2023, largely owing to a cheap yen. This indicates that Japanese who receive more income from foreign investment now enjoy greater purchasing power. More importantly, a weak local currency creates a moderately inflationary environment that promotes growth — what the late economist Arthur Okun and, more recently, U.S. Treasury Secretary Janet Yellen have called a “high-pressure economy.” Such an economy generates more employment opportunities and facilitates technical progress, partly by ensuring that resources are allocated quickly and efficiently. By contrast, during a recession, people are less willing to change jobs or to innovate. Japan’s post-World War II economy exemplifies this dynamic. The yen’s dollar exchange rate was originally fixed at ¥360 and, even after shifting to a floating exchange rate in 1973, remained low until the mid-1980s. Dale Jorgenson and Koji Nomura found that, as a result of the yen’s relative weakness, the average cost of production was generally lower in Ja …nnDiscussion:nn” ai_name=”RocketNews AI: ” start_sentence=”Can I tell you more about this article?” text_input_placeholder=”Type ‘Yes'”]