Abenomics and us

WASHINGTON, July 16 -- Abenomics. That’s the popular name of the ambitious suite of measures Japanese Prime Minister Shinzo Abe introduced in December to inject new life into the chronically anemic Japanese economy. The result has been an aggressive depreciation on the value of the yen.

So far, the Japanese currency has lost nearly one-fifth of its value relative to the U.S. dollar. At the beginning of this year, the exchange rate was only 85 yen per dollar. Now that figure is hovering at around 100 Yen per dollar.

And experts expect the yen to slide even further by the end of this year. The average forecast from analysts surveyed by Bloomberg last month was 105 yen per dollar.

However, even though American consumers will be able to get more yen with the dollar, they are unlikely to see cheaper Toyota pick-up trucks and Sony PlayStations anytime soon, according to international trade expert Dr. Rodney Ludema.

Ludema, an associate professor of economics at Georgetown University and a former member of the White House Council of Economic Advisors, reviewed the effects of the yen’s depreciation on the U.S. in an interview with Medill News Service.

A: It probably won’t have a very big effect. Historically, Japanese firms tend to absorb exchange rate changes in their price margins - they would price to market. That means rather than lowering their prices in the U.S. market to expand export volume, they keep the prices roughly constant and earn higher profit.

Q: But “Abenomics” is geared towards boosting Japanese exports via a depreciation of the yen. How can this be achieved if the price of Japanese goods remains constant in foreign markets?

A: I think Abenomics probably isn’t going to be very effective in actually boosting Japanese exports. But politically, this is a very popular thing for Abe to do. The export industry is very happy with this because they do tend to earn higher profits on their exports. But I think, in terms of the level of Japanese exports, it’s not going to have a big effect. It’s more going to compensate for the decline in demand in a very weak world economy – the IMF (International Monetary Fund) has just lowered its downgraded their growth forecast for the world economy - than cause an expansion in exports.

Q: And how long do you think Japan is likely to keep its expansionary monetary and fiscal policies in place for?

A:That’s a good question. I think if the U.S. starts to unwind its expansionary monetary policy, it would probably be difficult for Japan to continue. Because what will happen is that investments will flow out of Japan to search for higher interest rates in other countries. Right now the U.S. isn’t a good place to invest because interest rates are very low, but as the U.S. interest rate moves up, investments will move out of Japan and into the U.S. And this would create problems for Japan.

Q: There has been talk of Japan’s aggressive efforts to depreciate the yen giving rise to a potential “currency war” among the world’s major economies, including the U.S. What is the likelihood of this actually happening?

A: I don’t see a currency war happening. All of the messages coming out of discussions at G-20 meeting indicated that the U.S. and the European Union were fine with the Japanese policy. Also, what you would start to hear before the onset of a currency war is official condemnation and you don’t hear any of that right now. I would think we would rather that they didn’t continue to depreciate the yen, but I don’t think it’s going to trigger a currency war. Now, maybe it might be the case that other countries will respond, like Korea, because Korea is a direct competitor of Japan and it’s likely to take unilateral steps to depreciate its currency. But so far, I don’t think there’s any indication the U.S. and the EU will do that.

Q: And why are the U.S. and the EU fine with Japan aggressively depreciating its currency when they have been exerting tremendous pressure of Japan’s neighbor, China, to revalue the yuan?

A: Well, I think that it mainly has to do with balance. The reason that is often cited by the U.S. for China undervaluing its currency is that China is running a massive trade surplus with the U.S., and it was preventing the market from correcting that.

A: I think there is also a lot of politics to it as well, because the truth is that Japan buys as many U.S. treasury bills as China does, so there is a bit of asymmetry in how we react to the two countries. There is a lot of concern about Chinese exports hurting the U.S. manufacturing industry but Japan is not perceived as big a threat in that regard. Ultimately, I think the calculation within the government is that look, Japan has been experiencing very difficult economic times for quite a long time now and they do need the flexibility to be able to give their economy a shot in the arm. China on the other hand, has been growing at a rate of 7 or 8 percent per year for the last 15 years and they don’t seem to have the same need for that kind of concession.

Q: And in terms of competition between exports in the international marketplace, how big is the overlap between goods exported by Japan and the U.S. compared to goods exported by China and the U.S.?

A: There’s probably more overlap between Japan and the U.S. than there is with China.

Q: So isn’t the country worried about a weak yen giving Japanese exporters the space to easily lower the prices of their goods – and not price to market – if they want to get a competitive edge over U.S. exporters?

A: One thing is that the overlapping U.S. and Japanese products tend to be high-tech so the competition by nature is not quite as severe. If we’re talking about a homogeneous product like steel, for example, where a bar of steel is a bar of steel irrespective of where it’s produced, you get more direct competition. You’d be just as happy to buy a bar of steel from China as you would from the U.S. so something like a currency change would make a big difference. (A lot of the overlapping U.S. and Chinese exports tend to be homogenous.) But in the case of cars or electronics, a Honda is a very different car compared to a Ford. So even though there might be a slight improvement in the price of a Honda, it’s not going to cause someone who wants to buy a Ford to switch over to a Honda. So the fact that the products are differentiated, it somewhat softens the direct competition.

Q: How long do you think the U.S. is willing to let the concession for Japan to aggressively depreciate its currency run for?

A: Once the Federal Reserve starts to unwind their quantitative easing, there would be discussions with the Japanese about doing the same thing.

Q: There has been quite a lot of talk recently about the Fed scaling back on quantitative easing. Do you think the fact that Japan has aggressive expansionary monetary policies will have an effect on the Fed’s stance on monetary policy?

A: I think the main debate at the FOMC (Federal Open Market Committee) at the moment about whether or not to unwind QE (quantitative easing) is whether or not we have achieved sufficient growth and whether or not unemployment is sufficiently low before its starts unwinding. External factors like the yen may enter the discussion but I don’t think it will have any direct effect.

What they’ll do is generate forecasts for inflation, growth and unemployment. Included in those forecasts will be all the different things that are happening in the economy – changes in inventory, changes in growth in foreign countries as well as changes in exchange rates – so the yen is an element that will get figured into those forecasts. It could have a marginal effect but I don’t see it having a big effect.

Q: So does that mean the gist of the Fed’s stance is going to be the same irrespective of whether the yen is depreciating or not?

A: Yes, I wouldn’t expect it to have any material effect on their decision. I think the yen’s depreciation will only have a very small effect on the indicators that the Fed uses to make its policy decisions. Therefore, it wouldn’t change the general direction in any way.