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Takenaka: Yen Undervalued

May 11, 2007
By Ken Worsley


On Wednesday, former Internal Affairs and Communications Minister Heizo Takenaka said during a speech that the yen’s current value against the dollar, at about 120, is undervalued and does not reflect Japan’s underlying economic fundamentals. Takenaka cited the growing number of yen-denominated foreign currency reserves as ’strong pressure’ that could drive up the value of Japan’s currency.

Takenaka also stated his opinion that the Bank of Japan should not raise interest rates at this time.

A few hours earlier, US Deputy Assistant Treasury Secretary Mark Sobel told Congress:

The yen’s real effective value is the result of a protracted bout of deflation in the Japanese economy that coincided with rising prices in the United States and other trading partners of Japan…The recovery has been under way for several years, but it has not been brisk and it has not yet gathered steam…One of the most important contributions Japan could make to the global economy, and to U.S. firms and workers, would be to resume sustainable and robust domestic demand growth and exit completely from deflation.

Did you pick up on the implications there? Sluggish domestic demand and perpetual deflation is somehow good for Japan! Is that what they’ve been after all this time?

At the same hearing, representatives of General Motors blamed the loss of 300,000 jobs in the US since 2000 on the cheap yen, which they claim has given Japanese-made cars an unfair price advantage over American automakers.

Our advice to GM and their ilk was to not get political on this issue, but instead to focus on fixing their revenue problems by building cars people get excited about. They must not read this site.

Filed Under Automotive, Exchange Rates, Finance 

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Comments

5 Responses to “Takenaka: Yen Undervalued”

  1. Billy-Buck on May 11th, 2007 4:46 pm

    The yen is not a currency. It is a competition index.

    “Sluggish domestic demand and perpetual deflation is somehow good for Japan! Is that what they’ve been after all this time?”

    YES!

  2. Ken on May 11th, 2007 11:50 pm

    The yen is not a currency. It is a competition index.

    As someone who gets paid in yen and spends it, I’d say it’s both.

  3. Joe on May 26th, 2007 11:36 am

    Absolutely. When a currency is undervalued, like the Yen and the Chinese Yuan, then it causes a boom in production and export because goods are cheaper to buy abroad. The reason China does not let the Yuan float freely is because they know that if they loosen up the value will soar and it will no longer be worth it for companies to produce goods their or for consumers abroad to buy their goods. Sure, Japan raise interest rates and allow the value of the Yen to rise, but the cost would be a huge loss in jobs and exports which defeats the purpose. They would rather stay in a depression where they can keep their people working and their exports up.

  4. Ken Worsley on May 26th, 2007 6:14 pm

    They would rather stay in a depression where they can keep their people working and their exports up.

    I’m wondering where you’ve seen that written down as part of official economic policy. That’s a pretty strong claim to make against the leaders of a nation, so some concrete evidence would be good to see; if it’s out there we’d all love to hear about it.

    Exports currently account for about 15-16% of GDP, which is quite high, up from the usual 10% of GDP. With a bit over 50% of the economy based on domestic consumer spending, that theory just doesn’t ring true.

    Interest rates and the value of the yen international FX markets have historically had no causal connection whatsoever. Have a look at historical data cross-comparing Japan’s interest and exchange rates.

    Fukui seems to be bending to the pressure a bit and saying that there is some form of relation, but he still holds that it is not as strong as outsiders with political agendas like to suggest. Paulson has said that the yen is traded in a fair and open market (which it is). And with the OECD saying both that Japan should and should not raise interest rates…well…

  5. John S on May 27th, 2007 4:34 am

    Ken, foriegners love to say stuff like that. It makes them think they are somehow privy to the inner workings and hidden motivations of a group of people who are, quite frankly, too incompetent to actually pull off such a feat - and there I go, playing their game.

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