The Strong Yen and Income
At the beginning of 1995, when the yen suddenly strengthened, business leaders spoke of “hollowing out” and the like as if something truly disastrous had happened. In the latter half of that year, when the yen weakened instead, it was reported as though the economy had thereby been saved.
I have serious doubts about this way of thinking.
When the yen reached 1 dollar to ¥80, my salary was $5000, and my meager savings of ¥1 million were worth $12500. Now my salary has fallen to $3800, and my savings to $9500. I was neither reprimanded nor did I make an impulse purchase. The yen simply weakened, reducing my income and savings, as measured in the dollar—the world’s standard currency—by 30%.
What is there to celebrate about one’s salary falling by 30%?
A Strong Yen Will Not Destroy Japan
No country has ever been destroyed merely because its currency appreciated. On the contrary, the process of a currency appreciating is the process by which that country’s weight in the world increases. Before World War 2, the British pound plunged against the dollar; during that process, exports flourished and economic growth remained high. Meanwhile, the U.S. economy fell into the misery of the Great Depression. Subsequent history, however, clearly tells us which country gained hegemony. The country of the Great Depression far surpassed high-growth Britain. Ruin lies precisely in a country’s currency becoming cheaper.
People often discuss the relationship between a weak or strong yen and trade surpluses or deficits, but this is a short-term relationship. Over the long term, there is no relationship whereby a stronger yen reduces Japan’s trade surplus. This is clear from Japan’s trade balance since foreign exchange shifted to a floating-rate system in 1974, and economic theory likewise holds that exchange-rate levels do not affect the trade balance. Arguments that a stronger yen reduces the trade surplus are based precisely on “mistaken intuition.”
What effect, then, does a stronger yen have on Japan’s economy?
First, a stronger yen changes the industrial structure of countries that trade with Japan. Japan is no exception. Industries that lose their comparative advantage because of a stronger yen will therefore be hollowed out. This is a grave problem for those industries themselves, but from the perspective of the country as a whole, it is actually desirable: industries without comparative advantage are shed, resources concentrate in industries that have it, and efficiency rises. (Of course, it is a serious problem if artificial distortions keep industries without comparative advantage at home while driving industries with comparative advantage abroad.)
As a result, the other country may become relatively wealthier. But Japan too will become wealthier than it is now. An attitude that refuses to welcome another country’s prosperity deserves to be scorned as insular.
A Country Invested In and a Country That Invests
This gap in perception appears to arise because Japanese people have not yet internalized the fact that, before they realized it, Japan changed from a country invested in to a country that invests.
For a long time after the war, Japan was a recipient of investment and not an investor. Growing economies generally follow this pattern. In such an economy, production itself is good, and any decline in output is a very serious matter. With no assets, people must live on income earned through production, so this is only natural.
Once a country has become wealthy and accumulated assets, however, this argument no longer applies. The same is true for individuals: if income from assets is sufficient, there is no particular need to work. The situations are similar. More specifically in the context of the yen, if the loss in the value of assets and their returns caused by a weaker yen exceeds the increase in production income that the weaker yen generates, then a weak yen can only be called deplorable.
I Would Be Overjoyed If It Reached 1 Dollar to ¥1
For these reasons, I believe a stronger yen is something to welcome, not deplore. In fact, although this is extremely unlikely, if the exchange rate reached 1 dollar to ¥1, my meager ¥1 million would have the purchasing power of ¥100 million in the world. Nothing could make me happier. I would surely live a life of leisure.
What about you?
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