What’s the least interesting thing that can fall on you? The yen.
This post has a lot to do with banking, foreign exchange rates, and money transfers. I don’t blame you if you sit this one out.
My Pay Cut
One of the old perks of working in Japan was that the Japanese yen was notoriously strong against other currencies. If I sent home 10,000 yen (about $100 in terms of spending power) I’d end up with about 12,000 yen in my bank account (about $120). You can see how amazing this is against debts accumulated in US dollars. I’d regularly send home about 70,000 yen per month ($700 spending power) and earn an extra $140 which I could put toward my bills.
But the yen has fallen against the dollar since October, which is giving salaried expats a pay cut of nearly 14 percent.
If you’re at all like me, none of this makes any sense. I’m not versed in economics outside of the three Planet Money podcasts I listened to in 2008. But watching my once-comfortable bubble of debt repayment dwindle, I got interested, so I decided to check out how currency exchange actually works.
American Apples to Japanese Apples
Let’s assume that, instead of a gigantic manufacturing company, I am… me. And instead of sending money home to pay off my school loans, I’m buying American apples to sell in Japan.
Obviously, I can’t send yen to an apple orchard. The farmer wants American dollars, which he can then use to buy American things for his business. But I have a bunch of yen. So, I have to go to a bank, which will change my yen into dollars. They then have my yen.
This is where things get interesting. Behind the scenes of the bank, millions of people are changing their local currency into dollars. Just as many people want to change their money into yen, too.
But there are only so many yen and only so many dollars. And the banks have a limited amount of them. So as demand rises for one currency, they can sell it to another. In a sense, the bank is selling apples, too, only what they are selling is money. For countries that use a floating currency, this exchange determines the value of their cash.
Imagine that a poor, despotic regime in Asia – Imaginationstan – sold MP3 players on the global market and nothing else. The software is terrible and you have to connect it with an old telephone cord. In fact, it’s just a music box with a telephone cord attached to it. If that’s the only thing this regime is selling – and that’s not far from the truth for some countries – nobody is in any mad rush to get their currency. So, the value of that currency is basically worthless in a floating system.
So if you are from an insanely productive economy like the US, European Union, or Japan, you can trade that for, literally, buckets of Imaginationstan UnicornCoins. But of course, you wouldn’t want to – that’s the point. (Many developing nations, to prevent complete economic collapse, “peg” their money to a stronger currency or to the cost of gold or silver or uranium or whatever else they want; this way, a bill actually stands for “its weight in gold,” so to speak).
Meanwhile, lots of people want to buy Japanese products, cars and sushi expertise. People buy American cars, or products like iPods, or they use services like Google. Oil buoys a lot of Middle-Eastern economies; banking buoys a lot of Europe. All of these exchanges create a market for money, which sets the exchange rate.
So, my apple-purchasing power is based on how many people want the money in my hand, as opposed to the people who want the money in the hand of the apple farmer. There are a lot of very boring factors that go into why some people would want more of one currency than another, but if you’re interested in that, you can find out more information by obtaining a macroeconomics degree from a nearby university.
The Weakness of Strength
A lot of people want to change their money into yen, and as a result, the yen has been powerfully strong against other currencies. While this strong yen was amazing for Japanese expats working in Japan, it was terrible for the Japanese economy.
For one, companies had to pass on the costs of making stuff in Japan to foreign customers. So, you couldn’t sell Japanese products cheaply overseas unless you streamlined your production. Japan has one of the most efficient manufacturing processes in the world (thanks, robots!) but basically could only keep up with the costs of inferior Chinese-made products. It didn’t hurt the value of the yen,
but it does hurt corporate profits, (So that’s debatable, see the section below) which has a more direct impact on things like employment. Only local banks (and expats with credit card debt at home) like a strong local currency. (Edit: Commenter Patrick points me to this article in The Japan Times, which points out that ” in terms of everyday import-intensive items like food and gasoline,” prices will actually increase as the yen drops).
This is why the new, conservative government of Japan – lead by former and current Prime Minister Shinzo Abe – is pressuring the Bank of Japan to commit to policies that would weaken the yen. It’s Abe’s dream to boost exports. According to Toyota’s numbers, a consistent change of 1 yen (a penny) against the US dollar would lead to increased profits of almost $397 million dollars over the course of a year, because sales would be higher and domestic production would be cheaper.
For decades, Japan has sent more valuable products out of the country than it has imported (generally importing raw materials like alloy and nickel to transform into more expensive premium items like cars, stereo equipment, and electronics) to the tune of about $2 billion a day. But when the March 11 earthquake hit, Japan started borrowing to rebuild. It also turned off nuclear facilities and began buying gas and oil. This started shrinking their export gap – in turn, weakening the yen.
How Ronald Reagan Made Teaching English in Japan Really Profitable
Any American alive in the 1980s will remember those “Made in USA” stickers that started appearing on everything. Many people my age may not remember the less wholesomely patriotic predecessor to those stickers, a Union-led campaign called “Smash a Japanese Car Day.” On the TV news you’d see an angry American auto worker smashing a Toyota to pieces, declaring that the rise of high-quality, low-cost cars from Japan were sparking layoffs at Ford, GM, and Chrysler.
Back then, the US dollar was sort of where the Japanese yen is today. It was worth more on the global market, few currencies even came close. This was good for the banks, who could use that money to get foreign assets (much the same way that I can use my yen to buy apples), but it was bad for manufacturers who had a hard time selling an American car in Europe for the same price as a German car, or even selling an American car to Americans for twice the price of a Japanese one.
So America decided to invite its rich friends to the Plaza Hotel in New York City. That’s where idea of a “global economy” was invented, and so were policies to regulate that global economy. The long and short is that everyone agreed to pretend the American dollar was worth less than what everyone wanted to pay for it.
Every country did a mess of stuff – borrowing, lending, spending – but what’s important is that the dollar deflated against the yen by 51 percent from 1985-1987. Suddenly, every Japanese “dollar” was worth twice what it was. You’d think this would have resulted in an American car hysteria in Japan, but it turned out the Japanese still didn’t care to import American vehicles, and few American exports of any kind ever “made it big” in Japan.
What it did do, however, was spur Japanese car manufacturers to open assembly plants in the USA, because skilled American labor was cheaper. The irony was not lost on Americans, who were already terrified of the Japanese economy. Soon the Japanese started buying American property, including landmarks like Rockefeller Center, which only increased America’s paranoia.
It also led to Japan’s collapse – property values within Japan became so high that the Emperor’s Palace was literally the same price as buying the entire state of California. Banks started lending money to everyone in Japan like candy, and Japanese people essentially just ate it, building shit like ski resorts on tropical islands and indoor wave pools on beaches. And as always happens when everyone is rich and happy and stupid, the entire system collapsed within six years, leading to twenty years of total economic stagnation in Japan.
Once the US economy crashed in 2008, the yen broke below the dollar, and for 4 years you could get nearly 20 percent more out of a Japanese paycheck if you sent it to America.
But now, to get out of the malaise, PM Abe is pressuring a drop in the value of the yen, hoping to boost exports and encourage foreign investment. So far, the Nikkei, Japan’s stock market, seems to love the idea. American Expats in Japan, however, don’t.
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“Only local banks (and expats with credit card debt at home) like a strong local currency.”
I don’t think that’s true.
“More relevant to the average person is the cost of living, so a drop in the value of the yen has more of a direct effect “on people’s wallets,” says Gucci-san, especially in terms of everyday import-intensive items like food and gasoline, which will go up in price.”
Great, thanks for the correction!
As an Expat who moved to Japan in 2011 and will be here through 2014 … all I can think is “aw crap.” As of today, that’s 15¢ on the dollar I am losing per 100¥ for sending money back home for bills/retirement/extra goodies … while I don’t want to complain on the whole “currency exchange” idea, I won’t. And just state it as an unfortunate situation for me personally of the current situation.
Good job putting exchange rates and inflation into digestible terms!
As a prospective TUJ student (advice welcome), I stand to gain from this. The Canadian dollar is also very strong, and that’s sending some manufacturing and other production into the US, which as you mention, is a *low-wage* nation, and it is relative to places like Canada where auto-workers still make ~$30 an hour.
“But when the March 11 earthquake hit, Japan started borrowing to rebuild. It also turned off nuclear facilities and began buying gas and oil. This started shrinking their export gap – in turn, weakening the yen.”
Well, that was what I thought was going to happen but note that the Yen became even stronger or at least stayed the same after the earthquake. The way some articles explained it was that many large Japanese companies that had funds in other currencies than Japanese Yen needed to start rebuilding things in Japan so they of course needed to get Yen and that made the demand high and Yen prices went up.
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