Wednesday, February 6, 2013

What's going on with the Japanese Yen? Why is it dropping?

The new Japanese government is trying very hard to drop the value of the currency so that the export industries can become strong once again. What? Doesn't everybody think that increasing the value of the currency is the way to go? No. Here is how it works.

The inflation inside Japan is non-existent. That means, the salaries don't go up just because the cost of living went up. Cost of living doesn't go up here. (Well, it is pretty steep alright, but that's because the value of the currency has risen, not because the prices of the actual products have risen.) So, people living within the country don't really have a problem with the devaluation of the currency. You got your meal for JPY500 before. You get it for JPY500 now. You got your camera for JPY 50,000 before. You get the current model for JPY 50,000 as well.

Also note that the amount salaries paid cannot be reduced just because the JPY got stronger. It can only go up.

Now let's look at this from industries' point of view. Say, Toyota for example, prices their latest sedan at JPY 1million. This amount doesn't change depending on whether USD1.00 is at JPY 100 (now) or at JPY 80 (few months back). Why? If they kept the price in USD fixed, they will get less JPY when they made a sale, and profits will drop because the salary is fixed in JPY. If they kept the price in JPY fixed, the price of the car in the US market will arise (in USD) and the resulting number of sales will drop, again causing less profits.

So the only way they can go back to the old profit margins is by dropping the JPY to the old value. Now, this won't happen naturally because Japan has a very strong economy. The government has to force it. What they do is print new notes and throw them into the market. The value of in total doesn't change because of this. The total value is fixed. So since there are now more money for the same total value, the value of money drops.

Like I said, if you are an individual who only buys Japanese products, you won't even notice this as a problem. But if you frequently buy stuff from eBay or use foreign services or buy foreign products (most computer parts!), you'll be pretty angry by now. For example, the Intel Core i7 3770K was at around JPY 26,000, but now it has increased past JPY 30,000. It's a good thing that Intel isn't bringing anything to the market that I wanna upgrade to. (Apparently, Haswell won't see much of a speed boost compared to IvyBridge.)

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