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Dollar and the yen: could old frictions re-emerge?

17:55, 12 April 2021

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Dollar and the yen

Strong dollar gains against the Japanese yen may be re-awakening memories of past frictions, when a strong US currency hobbled the efforts of American exporters to the world’s third-largest economy.

Back in the 1980s, it was probably the most fraught currency relation in the advanced world.  Squaring up on either side of the Pacific Ocean, the dollar’s strength against the yen, far from being a source of American pride, triggered accusations that Japan was deliberately “low balling” its currency to shut US exporters out of its market while making its own goods cheaper.

At that time, huge surpluses of Japan export earnings in America were cited as proof positive that this was the case. Tokyo retorted by suggesting US industry improve product competitiveness and make greater efforts to sell in Japanese markets.

Two developments have helped take the steam out of this issue, which was summed up by a cover of The Economist magazine at that time featuring a diminutive Uncle Sam standing on the open palm of a towering Sumo-wrestler type character under the headline: “Now I’m richer than you.”

Past echoes

The first was the lengthy period Japan spent in the economic doldrums after the 1980s bubble burst. Over time, the country seemed to pose less of a threat to US economic dominance than had once seemed the case.

The second was the rise of China, barely an issue in the 1980s, given that its embrace of aspects of market economics did not occur until nearly the middle of that decade. Today, China can seem both an economic and a security threat – Japan may have sold cheap Toyota cars to middle America, but it did not look likely to annex Taiwan.

However, echoes of the past may be heard from the recent strength of the dollar against the yen. This morning, the dollar slipped 0.12% against the Japanese currency, buying 109.494 yen, but that still left it higher than its level of a month ago, when, on 12 March, it changed hands at 108.930 yen and 12 January, when a dollar bought 103.747 yen.

Momentum seems to be with the dollar, given the three-monthly low was seen on 21 January, when a dollar bought 103.512 yen, and the three-monthly high was reached on 31 March, at 110.750 yen.

“Balanced growth”

Dollar strength reflects in part the expectation that US interest rates will have to rise to bear down on the inflation likely to be stoked by vast stimulus packages from Washington. Even before current trends, the American authorities were concerned at the trade imbalance with Japan.

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In a report to Congress in December, the US Treasury wrote; “Japan posted a sizable current account surplus of 3.1% of gross domestic product over the four quarters ending in June 2020 and a bilateral goods trade surplus of $57bn with the United States over the same time period.

“As economic recovery takes hold, Japan should pursue reforms that raise productivity, increase potential output, and facilitate strong and balanced growth.”

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