How strong or weak is JPY from a historical point of view

[jaichind]

With Abeconomics being debated in Japan with the surprise mid-terms, the role of JPY is often front and center in the debate.   A recent poll of Japanese companies report that the weaker JPY has hurt 50% of Japanese companies and help 5% of Japanese companies (mostly exporters I assume.)  One argument for Abe's policy of the weak JPY is try to get out of the deflationary spiral.  Another argument is that JPY which was around 79 when Abe came into office was crushing the Japanese corporate sector especially since the JPY was as weak as 200-250 range during the 1970s and early 1980s.  It this part I want to write about and to extent challenge.  True the JPY strengthened at lot since the 1980s but I claim that is mostly as a result differences if price changes (inflation) between USA and Japan.   I use GDP deflator as the best broad measurement of general price levels.  I then calculated the average JPY rate for each year from 1983 to now.  And then I produce this chart.

Year JPY/USD  USA GDP   Japan GDP
                       Deflator    Deflator
1983   237.51   3.95%   0.91%
1984   237.56   2.55%   1.74%
1985   238.38   3.20%   1.01%
1986   168.58   2.02%   1.78%
1987   144.60   2.55%   -0.11%
1988   128.15   3.50%   0.33%
1989   138.05   3.89%   2.23%
1990   144.80   3.70%   2.26%
1991   134.53   3.33%   2.61%
1992   126.70   2.28%   1.59%
1993   111.17   2.38%   0.44%
1994   96.61     2.13%   0.11%
1995   94.03     2.10%   -0.75%
1996   108.79   1.82%   -0.55%
1997   121.02   1.72%   0.60%
1998   130.76   1.10%   -0.05%
1999   113.71   1.52%   -1.25%
2000   107.78   2.27%   -1.25%
2001   121.52   2.27%   -1.18%
2002   125.22   1.52%   -1.55%
2003   115.91   1.97%   -1.73%
2004   108.12   2.75%   -1.38%
2005   110.05   3.20%   -1.25%
2006   116.37   3.07%   -1.13%
2007   117.81   2.67%   -0.93%
2008   103.40   1.97%   -1.25%
2009   93.59     0.77%   -0.53%
2010   87.75     1.25%   -2.15%
2011   79.71     2.07%   -1.88%
2012   79.84     1.77%   -0.95%
2013   97.59     1.50%   -0.60%
2014   104.50    1.53%   1.33%
11/2014    118

Notice that for every year from 1983 to 2014 the general level of prices has increased (sometimes decrease) less in Japan than the USA.  In fact, I did some calculations of specific years to project which should the 2014 JPY rate should be if the JPY rate just reflected differences of price movements in each economy.  I got the following
        
            JPY rate                predicted JPY rate
           for that year         in 2014 to reflect relative
                                       changes GDP deflator
1983      237.51                   107.90
1987      144.60                     70.11
1995       94.03                      52.85  
2002      125.22                     83.74
2007      117.81                     96.01
2012        79.84                     76.06

11/2014                                 118

What we conclude is that as long we take price level change differentials between USA and Japan into account, the current JPY rate is very weak relative 2012, super weak relative to 1995, and still slightly weaker than 1983 when Japan was in its economic heyday.

What I am trying to show that a weaker JPY really not the answer to the current economic issues in Japan.  It could help on the short run to try to get out of deflation which I think is somewhat successful but taking relative price levels into account Japan's export sector is no less competitive in terms JPY rate than in 1983.  

[AggregateDemand]

Nice data. Your conclusions seem congruous with Japan's foreign exchange reserve policy so the deflator calculations look solid.

Japan's monetary policy and currency economics are complicated by Western standards because you have to assume an irrational self-defeating MPS. While I agree that a weak yen is not necessarily beneficial for Japan, especially as they import energy to replace lost production from Fukushima, the aggressive QE by the BoJ and Abenomics policies are designed to introduce inflation into the Japanese economy to discourage savings.

If Japan cannot stimulate domestic consumption, domestic production will probably not be a viable economic outcome, and the Japanese will always be stuck as an export-based economy.

[jaichind]

DPJ main policy wonk is coming out and saying that JPY at 118 is too weak and is hurting Japanese consumers and business.  He advocates for a JPY of 95-100.  So the DPJ is for the JPY of the mid 1980s and LDP is for JPY of the late 1960s and early 1970s. 

[jaichind]

I thought I would present the same data for the PRC and CNY since the USD-CNY rate has been controversial over the last decade.  They came out to be the chart below.  Note the PRC has a higher GDP deflator than USA in all years other than the 1997-2001 period when the PRC was adjusting to the Asian economic crisis and working through the affects of the large bubble that took place in the 1993-1997 period.

Year CNY/USD  USA GDP   PRC GDP
                       Deflator    Deflator
1983   1.98   3.95%   1.00%
1984   2.33   2.55%   4.94%
1985   2.94   3.20%   10.20%
1986   3.46   2.02%   4.75%
1987   3.73   2.55%   5.16%
1988   3.73   3.50%   12.08%
1989   3.77   3.89%   8.51%
1990   4.79   3.70%   7.67%
1991   5.33   3.33%   6.86%
1992   5.53   2.28%   6.91%
1993   5.78   2.38%   17.55%
1994   8.62   2.13%   20.20%
1995   8.35   2.10%   13.48%
1996   8.29   1.82%   6.65%
1997   8.28   1.72%   0.74%
1998   8.28   1.10%   -1.70%
1999   8.28   1.52%   -2.13%
2000   8.28   2.27%   -0.03%
2001   8.28   2.27%   1.95%
2002   8.28   1.52%   1.28%
2003   8.28   1.97%   3.08%
2004   8.28   2.75%   7.01%
2005   8.19   3.20%   4.62%
2006   7.97   3.07%   5.46%
2007   7.60   2.67%   4.82%
2008   6.96   1.97%   8.10%
2009   6.83   0.77%   1.07%
2010   6.77   1.25%   4.60%
2011   6.46   2.07%   7.35%
2012   6.31   1.77%   4.05%
2013   6.15   1.50%   2.90%
2014   6.16   1.53%   2.31%
Now     6.13      

Some history of CNY.  Throughout the 1980s as the PRC reformed its economy the CNY declined at a fairly rapid clip.  Then in 1994 CNY made a dramatic drop which was part of its policy of liberalization of prices to be based on the market.  This weakened CNY did help to make the PRC export sector to be quite competitive.  Of course one part of this was that the PRC had a significant capital sector which meant it did not have to import capital infrastructure in large quantities or else the weak CNY would have hurt its export sector.  Anyway, under pressure from USA CNY began to rise from 2005.


            CNY rate                predicted CNYrate
           for that year         in 2014 to reflect relative
                                       changes GDP deflator
1983         1.98                        5.22
1984         2.33                        6.34
1987         3.73                        9.06
1994         8.62                      14.11  
2004         8.28                      10.88
2007         7.60                        9.27
2012         6.31                        6.54

11/2014                                   6.13

So the CNY today is really back to the levels of 1983-84 once price levels are taken into account.  So the decline of the CNY from the 1980s to 1994 has since been reversed.  The PRC export sector is still quite competitive despite this.

[AggregateDemand]

CNY is also ridiculously undervalued, but pushing for appreciation is a case of be-careful-what-you-wish-for. Since 2005, the dominant economic trend is trade deficit growth with China because we are addicted to cheap Chinese goods (see also: oil).

Strong USD is probably still the best situation for the global economy, but dollar strength needs to be backed by a powerful US economy and middle class, not buy Asian central bankers who buy up $1T in US foreign exchange reserves as Japan and China have done.

[jaichind]

JPY now at 121.  Normura expect it to go to 125 next year regardless of election results.  There are even talks of JPY at 200.  Looks like we are for sure headed to the JPY in terms of relative prices of the 1960s. One can say "well, JPY was around 120s in 2007 so what is the big deal."  My response is once we take into account of relative prices.  The 2007 rate average 117.81 is really 96.01 today.   So JPY at 121 now puts JPY 25%-30% weaker than JPY was in 2007.

[jaichind]

Kyodo news came out with this article.  Sort of follows the same argument that JPY is now the JPY of the 1960s in terms of weakness after we take price levels into account.


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Yen's effective exchange rate at lowest since 1973+
TOKYO, Dec. 22 Kyodo
The yen's real effective exchange rate has fallen to the lowest since 1973, Bank of Japan data showed Monday.
The average real effective exchange rate of the yen in the first half of December came to 69.51 against the 2010 base of 100, according to the BOJ's calculation as of Dec. 17 -- the lowest since January 1973 when the rate was at 68.88 and the first drop below 70 since the Japanese currency moved to a floating exchange rate system in February 1973.
A currency's rates are determined against each of other currencies. But the real effective exchange rate is a weighted average of a currency's exchange rate against the currencies of its trading partners and seen as an indicator that captures the international competitiveness of the currency.
While the U.S. dollar moved in the 119 yen zone in Tokyo trading on Monday, the data indicate the yen's actual strength has dropped to the level seen about 42 years ago when the dollar was around 300 yen.
Behind the sharper depreciation of the yen are more than 15 years of deflation in Japan, the yen's slide sparked by the BOJ's additional monetary easing and its fall against the yuan whose moves tend to be linked to those of the dollar.
When Japanese companies import materials and foods, the purchase costs become higher when the yen's value is lower not just because the yen is weaker but because the companies buy them from countries where prices are rising at a higher pace than in Japan.
Importers have no choice but to bear a "heavier burden than the yen's rates show," said Tsuyoshi Ueno, a senior economist at the NLI Research Institute.
The yen's slide, on the other hand, encourages foreign travelers coming to Japan to buy expensive goods at department stores and other shops, as those goods look relatively cheap for them.
Exporters are also supposed to benefit from the yen's drop. But Japan has failed to boost exports significantly after the yen's surge following the 2008 financial crisis prompted major manufacturers to shift their production overseas to blunt the impact of the stronger yen.