Wednesday, January 21, 2009

Dollars and yen(ts) (Noah Smith)

There's an interesting article in BusinessWeek asking whether Japan will intervene to push down the strengthening yen. The consensus seems to be that it will, even though such a policy is not necessarily optimal from an economic viewpoint, and may not in fact work. But a weak yen seems to still be an important part of Japan's industrial policy. Why?

While "classic" theory holds that currency intervention is always inefficient, a new school of thought holds that it's in fact very useful for developing countries. The reason, as Dani Rodrik explains, is that domestic exporters engage in "cost discovery" — holding down your currency gives your domestic companies the chance to find out what they're best at, which is good for long-term economic strength.

But Japan is manifestly not a developing country. And Japanese companies have by now had plenty of time to find out what they're good at. So at this point, an artificially weakened currency serves mainly to boost employment in Japan's export industries at the expense of (a) efficiency (what is Sanyo's core competency again?), (b) Japanese consumers, and (c) industries that serve the Japanese market.

Fine, you may say, that's a fair trade. After all, employment gets a boost. But does it? Employment levels are different from employment volatility, and exports are notoriously volatile (because terms of trade can change quickly). Even if a weak yen increases Japanese employment — which is far from obvious — it may actually make Japanese jobs less secure. A global downturn, or a rapid increase in terms of trade — both of which we are seeing now in Japan — can force companies to either default on their debts or fire workers. In the 90s, Japanese companies did the former; they are now doing the latter.

In other words, this is a pretty clear example where Japan's reflexive (and politically motivated) adherence to "developing country policies" has probably backfired. Just another way that reforming the country's sclerotic political system could yield real benefits for the economy and people of Japan.

— Noah Smith


Anonymous said...

I'm not sure that 100 yen to the dollar is a "weak yen". 120 yen maybe. But 90 or less? That seems like a very, very high yen, almost as though the US dollar has been pushed artificially low.

Do you have a ballpark figure for what you think the yen should be?

Anonymous said...

Are you trying to propose that currency levels are a reflection of some kind of 'efficient' equilibrium? If so, perhaps it is time to reflect on the gyrations of the last few months, which have little to do with government intervention, a lot to do with currency trades underpinned by interest rate differentials, and not a whole lot to do with efficiency in the textbook sense.

Noah said...

Hey, this David Pilling article in the Financial Times came out too late for me to include it in my post, but it makes many of the same arguments.

It's also better-written...

Anonymous said...

the strong yen is killing me.
Ive gone from 210~20yen to the pound now down to 130 in just a few months....ive had a major pay cut in-effect!