Introduction
The exchange rate is a very significant economic variable that all markets keep a close watch. Exchange rates are influenced by multiple factors both political and economic. A variation in exchange rates implies that the reference currency has become weaker or stronger against the underlying currency. The Japanese Yen has experienced numerous stability swings against other currencies over the past here decades. The worst point in the era experienced by the Yen was in the early 1980’s when the Yen weakened to trade at as low as between 200 – 270 yens per dollar. This condition persisted until after September 1985 when the giant Western economies agreed to devalue the dollar in the Plaza Accord. The plaza accord saw an appreciation of the Yen to a more stable exchange rate of 80 per dollar in one decade.
This paper seeks to analyze the magnitude of the Yen fluctuations and the effects of the same in the Japanese economy. Exchange rates form a significant economic variable that cannot be overlooked especially for a giant industrial and trade participant on the global arena like Japan. As such, the constant fluctuations in the Yen’s exchange rate must have had far reaching impacts on the Japanese economy. The paper seeks to give a clear insight into the sequence of the economic events that have been attributed to the unstable Yen. The analysis is based on the short- term development interactions that rely on monetary factors and factors determining the long term exchange rates in the economy. The critical long term economic determinants of the exchange rates include the levels of production in different sectors and the existing trade terms. The great interest in exchange rates for Japan by economists are due to the fact that the Japanese economy is heavily dependent on export trade. (Tokuo and Ayato)
Identification of problems
The fluctuations of the Japanese Yen can be associated with several problems that have displayed a recurrent nature in the Japanese economy. Upon the endorsement of the Plaza accord in 1985, the strength of the Japanese yen was manually increased to trade at most 80 per dollar. The newly appreciated Yen saw the Japanese economy dash into a quick skyrocketing in market prices for shares and other key market dominant elements of trade such as real estate. (Obstfeld). This bubble economy would however not last forever as it eventually collapsed and the economy of Japan was on the receiving end again with sharp declines in asset values, reduced economic activity and growth, banking crises and an alarming rate of deflation. The order of economic events in Japan since the late 1980’s depicts the crucial role played by the emergence and bursting of the bubble during the period. The ordeal further confirms the great importance of macroeconomic and financial stabilities and their impacts on the market prices of assets.
The miracle appreciation of the Yen was bi-faceted strategy whose impacts on the Japanese economy were also twofold. Japanese tourists and importers were advantaged by the appreciation while the Japanese exporters were on the losing end. The Japanese products as a result became more expensive overseas thus less preferred and purchased while the foreign goods became cheaper in Japan and so the Japanese population preferred buying foreign products to Japanese products. This Mismatch was regardless the Japanese soaring capability to produce more goods for domestic and export sales. This strong yen really hurt the Japanese export sector since their exports became less competitive in the international markets. (Hays) The construction and bursting of the Japanese economic bubble was responsible for the aftermath which was characterized by massive economic stagnation and alarming deflation rates. (Colombo)
Analysis
The problems identified above can be justified by an in depth analysis of the Japanese economic journey since the enactment of the Plaza accord and also the events before 1980. The Japanese economy had gone through a boom period, Iwato, in the late 1950’s that was characterized by heavy investment demand driven by the massive technological developments. This period of high economic activity and growth was characterized by rapid increases in asset prices and a remarkable real economic growth that surpassed 10. During the Iwato, Japan experienced a successful export trade and put in place strict fiscal policies with the aims of stimulating household savings. The increased household savings translated into surplus cash banked by the citizens of the country. The banking system eventually had excess liquidity/a lot of cash to lend out and this triggered the adoption of lenient lending.
The Plaza Accord came in to strengthen the Yen against the dollar. The tripartite combination of the excess liquidity, financial deregulation and export trade boom fooled the Japanese economy into overconfidence. Due to the financial deregulation, banks started taking increasingly unsecured risks even on money borrowed from capital markets. (Colombo) The period between 1980s and 1990s was characterized by an influx in equity yield. The anxiety generated at the onset of the bubble created unrealistic economic expectations that could only be achievable in the short run but totally unachievable in the long run. The bubble emerged and expanded due to a number of reasons:
Antagonistic behavior of the banking institutions
Excessive confidence and elation
Tax regulations that were encouraging a rise in general prices
Over-centralization of almost all economic functions in Tokyo.
Lack of sufficient risk management in the financial organizations.
The capital accord
The appreciation of the Japanese Yen was responsible for the rising prices of land and other assets during the boom but these prices declined sharply during the Endaka Fukyo. The rise and fall of the prices of assets influenced the Japanese real economic activity by inducing increased consumption and heavy investment. This was experienced at the inception of the bubble. After the burst of the bubble, economic events turned and they resulted in unexpected pressure on the real economic activity. This pressure was created by the compulsory economic correction on the asset prices. The fluctuations in the exchange rates resulted in cyclic price instabilities and fluctuations. (Shi r atsu ka)
The de-regularized banking system was exposed to huge, risky and unexpected shocks. Since the Japanese banking sector had failed to accumulate the internal reserves that could protect the economy against such shocks, the risk smoothing function of the entire banking sector had deteriorated. The aggressive lending by banks at relatively low interest rates in Japan left the financial institutions at risks that were higher than their profits. (Colombo)
The economic slump in Japan was well indicated by the persistent fall in real GDP from 5% in 1990, to 3.3% in 1991, 1% in 1992, 0.2% in 1993 and -2.4 % in 1994. Interest rates also fell from 8% in 1991 to 2% in 1994. The early years after 1990 were characterized by increased financial stress in the Japanese economy due to many defaulted loans, and the loss of value of real estates. Liquidity bottlenecks engulfed the country due to the fall in the value of land and other assets that had been used as collateral. (Yoshino and Taghizadeh-Hesary)
Potential solutions
These are the possible remedies to the Japanese economy. Japan could adopt monetary policies to save the situation. Such policies could aim at reducing inflation and sparking economic growth. A check on the lending interest rates would instill sanity and stability in the financial sector and reduce the risks associated with excessive lending.
The financial controls should also aim at reducing the financial outflow from the government to local governments. This will act as a check on the cash flows in the country which has a direct link to interest rates and economic activity. The establishment of trust funds will as well serve as insurance for the riskier businesses. This will act as a buffer for such businesses to avoid a repetition of the financial crisis that was caused by the bursting of the bubble.
A check on the working population age would also be a useful tool to ensure maximum productivity. A reduction of the aging population from the workforce would cause an upward shift in production volumes. A young working population tends to be more productive than an old working population and this is one reliable strategy to increase efficiency and output in the country. (Yoshino and Taghizadeh-Hesary)
Above all remedial measures that could see the Japanese Yen stable and hence the country’s economy, is the freedom of market forces to determine the value of the Yen. All the dramatic economic up and downturns occasioned by the fluctuations of the Yen could be avoided if he currency was left to find its own niche in the international financial market. The Plaza accord was a manual empowering of the Japanese Yen and it lacked the proper economic backing to ensure that the currency remained competitive. Other than applying fiscal and monetary policies to stabilize the Japanese economy, market forces should also be left to act on the Yen. Japan can establish sustainable development projects and products that will make their currency competitive.
Conclusion
The Japanese Yen has all along displayed a high degree of instability and this has directly translated into a staggering Japanese economy. The economic fluctuations have been characterized by unstable prices, interest rates and other economic indicators such as real GDP. The Plaza accord seems to have been a half baked strategy that multiplied the Japanese economic tribulations at the burst of the bubble contrary to its initial intention of empowering the Japanese economy.
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Works Cited
Obstfeld, Maurice. "Econometrics Laboratory, UC Berkeley". Eml.berkeley.edu. N.p., 2009. Web. 1 May 2016.
Colombo, Jesse. "Japan's Bubble Economy Of The 1980S |". Thebubblebubble.com. N.p., 2014. Web. 1 May 2016.
Hays, Jeffrey. "VALUE OF THE YEN: FLUCTUATIONS, STRONG YEN, HOLLOWING OUT OF THE ECONOMY AND THE TSUNAMI | Facts And Details". Factsanddetails.com. N.p., 2009. Web. 1 May 2016.
Yoshino, Naoyuki and Farhad Taghizadeh-Hesary. "Frankfurt 2016". Asian Development Bank. N.p., 2015. Web. 1 May 2016.
Klenner, Wolfgang. Japan's Economy. Nagoya, Japan: Economic Research Center, School of Economics, Nagoya University, 1999. Print.
Tokuo, Iwaisako and Nakata Ayato. "RIETI - 独立行政法人経済産業研究所". Rieti.go.jp. N.p., 2015. Web. 1 May 2016.
