Wait, Japanese Travelers Trying to Go to the U.S.!

Naoki, a junior student at a college in the center of Tokyo, made a nice plan named Happy Memory in the end of September 1999. This plan is to travel in New York with Miki, his cute girl friend at the same college, before his graduation in one and half years. He knows Miki has wanted to visit New York for a long time. Therefore, Naoki is sure this Happy Memory can make the terms with Miki better and firmer. However, travelling overseas is not cheap, so he not only searches travel magazines for the sights in New York vigorously, but also pays attention to the exchange rate between the dollar and the yen in Yomiuri Shimbun every day. The reason is because he knows the exchange rate strongly affects the expense of travels. Through this story, I can clearly say Naoki is a wise and economical guy because he knows the stronger yen makes their trip in the U.S. cheaper. In other words, he can exchange the same amount of the yen for the more dollars if the yen rise against the dollar. Of course, everyone wants to go overseas at lower price, so the exchange rate between the yen and the dollar is important for those who have the yen in Japan want to go to the U.S. In reality, the yen soared against the dollar after the end of 1998, and the exchange rate was the middle of the 107 yen level per dollar on October 13 1999 (�gDollar Rises�c�h 12). The Japanese yen will become much stronger against the U.S. dollar before 2001.

In this paragraph, I will explain the definition of the exchange rate and why it strongly affects foreign travels with an example. There is a definition of the exchange rate. �gThe exchange rate is the amount of one currency that can be obtained for another currency�h (Rugman and Hodgetts 195). For example, if you want to travel in Hawaii next Sunday, you must exchange the yen for the dollar. Assuming today�fs exchange rate is 100 yen per dollar, and you want 1000 dollars for this trip, you can receive 1000 dollars with 100000 yen. If the yen rise to 90 yen per dollar tomorrow, you can get the same 1000 dollars with 90000 yen. In this case, you can fortunately save 10000 yen because the yen rose against the dollar by 10 yen. However, predicting exchange rates is difficult because many factors can affect exchange rates, but traders/brokers, speculators, hedgers, arbitrageurs, and governments are the five main groups that affect exchange rates. The reason is because they often sell and buy large amounts of currency in markets. Moreover, purchasing power parity, interest rates, and technical factors such as national economic statistics and seasonal demands are important factors (Rugman and Hodgetts 206). I will mainly use these elements that have a great influence on exchange rates to explain why the yen will become stronger against the dollar.

At first, purchasing power parity tells us about the further fall of the dollar against the yen. According to purchasing power parity, all kinds of currencies should have the same purchasing power. Accordingly, even though you change the currency A into the currency B, you can buy the equal amount or number of the same or similar goods with the currency B as the currency A can (�gChapter 17�c�h). For instance, an apple costs 1 dollar in the U.S. and costs 100 yen in Japan. Then, the exchange rate should be 100 yen per dollar. If the apple suddenly rise to 2 dollars in the U.S. in 1 month because of inflation and one is the same price in Japan, the exchange rate should e close to 50 yen per dollar. This is because the dollar lost the half of the purchasing power. As you can see, the inflation in the U.S. lowers its purchasing power, and the dollar should fall against the yen in order to make up with the gap of the purchasing power. However, there are many kinds of goods in the real world. The price of some goods falls and that of others rises. Therefore, if you want to know the movement of the prices, you should use data that are announced by the governments regularly such as Consumer Prices Index because the data is more reliable. In the real world, purchasing power parity is only one of the factors that determines exchange rates, so it is almost impossible that the ratio of the prices is the same as the exchange rates. Therefore, I can say a currency losing more purchasing power or gaining less purchasing power in comparison to other currencies will be expected to decline against other currencies if focusing on only the relationship between purchasing power parity and exchange rates.

Now, Japan has been in the long recession since the burst of the bubble economy in about February 1991 (�gBusiness Cycles�c�h 83). The Nikkei stock price is about 17000s that is less than half of the highest price in the bubble period (�gNikkei Stock Average�h). According to one research, the Domestic Wholesale Price Index in 1999 is about 96% of the level in the middle of 1995 (�gThe Domestic�c�h). Also, the Consumer Price Index is in the Downward Price Rigidity that means the state in which the speed at which the prices fall is slower than that in which they rise (�gDownward Price Rigidity�c�h). Just imagine when you are pulling at a spring to the opposite direction with your hands. As you extend the spring, it will be difficult to pull at the opposite direction, and the hands are easy to be pulled inside. Like this example, we can see the Consumer Price Index has reached almost the lowest level and it is hardly falls recently in spite of the recession. Therefore, we can say Japan has almost no change in the prices recently, and the yen�fs purchasing power is about the same. Unlike Japan, the U.S. economy is like a ballooned bubble today. The symbol of the bubble is the overvalued Dow [the U.S. stock price] like Japanese bubble period during November 1986 to February 1991(�gBusiness Cycles in Japan�c�h 83). The Dow was just about 4000 dollars in the 1995 (�gRelative Comparison�c�h). However, it rapidly became higher than 10000 dollars in April 1999 (�gDow Industrials�h). However, the overheated U.S. economy is starting to cause its negative sides. In fact, the symptom of the inflation is appearing. According to the government research, the U.S. Consumer Price Index in the fourth quarter [October to December] in 1998 rose 0.5%. In 1999, it rose 0.4% in the first quarter [January to March] and 0.7% in the second quarter [April to June]. In addition, it rose both 0.3 in both July and August (�gConsumer Price Index�h). This is the very symptom of inflation, and it has become more obvious, so the dollar is losing its purchasing power and will lose more. As you can see, although the purchasing power of the yen will be the same in the near future, the dollar is losing its purchasing power. This is purchasing power parity explain the further rise of the Japanese yen against the dollar.

Second, the expectation toward the recovery of the Japanese economy makes people, such as investors, traders/brokers, speculators, hedgers, and arbitrageurs become more willing to keep money with the yen than the dollar. The previous Prime Minister Ryutaro Hashimoto attached importance to the reduce of the government budget deficit. As a result, Japan economy became worse. After Keizo Obuchi became the Prime Minister of Japan, the economy looked better because he thought the recovery of the economy is more important than the reduce of the budget deficit of the Japanese government. Recently, the consumption is very poor and the unemployment rate is so high. Therefore, he decided to issue the Japanese government bonds in order to increase the government expenditure that can reduce unemployment rates and stimulate the consumption or economy although the bonds will increase the budget deficit. He thought the budget deficit would decrease by increased tax revenue if the economy becomes better. Today, Japanese economy recovered gradually after a few stimulus packages. There are some reports about Japanese economic recovery. According to the Ministry of Finance�fs saying, housing starts rose a seasonally adjusted 10.7% in August from July, while orders received by construction companies rose 14% in August from July (�gYen Resumes�c�h 15). This is the sigh that the consumption is rising. Also, the Tankan report of the Bank of Japan showed the automobile and electric machinery industries for good domestic sales are increasing its confidence even though the force for recovery is weak because of the poor consumption (Sakamoto 12). What is more, the Japanese government is planing a new stimulus package worth more than 90 billion dollars to help the economic recovery even though the rise of GDP was 2% in the first quarter and 0.2% in the second quarter (Chandler 1+). I think this is necessary to increase the further optimism.

Unlike Japan economic recovery, the U.S. economy is slowing down little by little. According to the government�fs report, the U.S. GDP growth in second quarter in 1999 slowed sharply to 1.6% in comparison to 4.3% in the first quarter (�gU.S. Economic...�h 13). In spite of the decline of theU.S. economy, the stock market is still like a bubble. Many companies are overvalued because the Dow became more than 2.5 times for about only 4 years and it still in the highest level today (�gDow Industrials�h). As you can see, it is very dangerous and not profitable for investors to keep the U.S. stocks. As a result, investors will try to sell the U.S. stocks to buy the other counties�f stocks. Once investors give up the U.S. stock market, large amounts of money will flow out of the U.S. to foreign countries. For investors, today�fs Japanese stock market is very fascinating because its economic recovery and low stock price, so the yen will soar against dollars. What is worse for the U.S., the babble-like stock price will fall sharply. Then, people, such as speculators, hedgers, and arbitrageurs will sell large amounts of dollars and buy the yen because of their expectations that the yen will soar against the dollar. These groups of people will also become strong force to push the yen against the dollar. From the point of expectations, you also can imagine the yen�fs soar against the dollar.

Finally, the most powerful evidence that can make the yen stronger against the dollar is the ballooning U.S. international trade deficit. Generally speaking, this trade deficit means the condition that the export of goods is less than the import of goods. The opposite condition is surplus. Trade is one part of currency account (Rugman and Hodgetts 181-184). Now, I will explain how the trade deficit affects the exchange rate. For example, there was trade deficit in the U.S. with Japan last month. Suppose the amount of the deficit was 10 billion dollars, Japanese companies became10 billion dollars�f surplus through the trade with the U.S. If people in Japanese companies want to use the money in Japan, they will sell the dollar and buy the yen. In this situation, the yen will rise against the dollar because these people need more the yen than the dollar. For those who want the yen, the yen become more valuable. Accordingly, this will make the yen more expensive than the dollar. On the other hand, if people want to use it in the U.S., they are not necessary to exchange the currency because they have the dollar. As you can see, the U.S. trade deficit can affect the exchange rate seriously if people want to use the money in their home countries.

According to the former U.S. Treasury Secretary Robert Rubin�fs report, the U.S. trade deficit soared to a new record 169 billion dollars in 1998, and about 64 billion dollars of the whole trade deficit is the trade gap with Japan (Beams). This is very huge deficit and has potential to affect the exchange rate seriously, but Japanese economy is not good in comparison to the U.S. Therefore, any of the surplus for Japan was not changed into the yen and the exchange rate has not been strongly affected. However, the Japanese economy is recovering , and the U.S. economy is slowing down as I mentioned before. As a result, the trade deficit will affect the exchange rate between the yen and dollar more seriously. In 29 Jan. 1999, the U.S. economist Fred Bergsten warned that the U.S. current account deficit in 1998 rose to about 300 billion dollars that is around 3.5% of the U.S. GDP. This level is the same of the previous peak in the middle 1980s, and then the dollar fell sharply by over 50% against the mark and yen (�gFred Bergsten Dollar.�h). As you can see, this amount of trade deficit is very powerful, and in the near future, this warning will be true if the U.S. trade deficit is large. However, the trade deficit has been growing in 1999. The trade deficit was 18.6 billion dollars in April, 21.34 billion dollars in May, 24.6 billion dollars in June and 25.2 billion dollars that was the record in July. These dada clearly shows the U.S. economy is too overheated, so this large deficit condition would make the U.S. to raise interest rates a 3^rd time this year to stop inflation. What is worse, the high interest rates will slow down the economy (�gUS Trade Deficit�h). All in all, the large U. S. trade deficit will make the yen much stronger as Japanese economy becomes better.

Now, although purchasing power parity, expectation, and the trade deficit can make the yen rise against the dollar, some people still believe that the government intervention in currency markets can stop the rise of the yen against the dollar. However, this idea is clearly not sufficient. This is because the government intervention can not solve the fundamental problems such as the U.S. trade deficit and stop the course of the exchange rate, but delay the rise of the yen temporarily. In fact, although Japanese government has already intervened in capital markets and bought 35 billion dollars by selling the yen since June to 9 September, the yen rose 13 % against the dollar (�gYen Drops�c�h 9). In addition, according to Hager, George, it is not easy to make the government intervention successful. In other words, the timing, psychology, and economic fundamentals are necessary to succeed the strategy (13+). As you can see, the government intervention is not a good way to control the exchange rate and not easy to succeed, so the yen will have the further rise against the dollar.

In addition, some people would say that the interest rate in the U.S. is much higher than that in Japan, so they want to change into the U.S. dollar and save their money in U.S. banks. However, these kinds of interest rates are not real but nominal. In reality, they are affected by the changes of the prices: inflation and deflation. Therefore, the real interest rate should be the nominal rate minus inflation rate or plus deflation rate. For example, you want to save 10000 yen in the Tokyo Mitsubishi Bank. Assuming the interest rate is 1% per year, your money will become 10100 yen in one year. At that time, if the inflation rate is 1% in comparison to today, the purchasing power of 10100 yen in one year is the same as 10000 yen today. In other words, you can only purchase the same amount or number of goods in comparison to today, so the real interest rate is 0 % [the real interest rate = the nominal rate (1%) ? the inflation rate (1%)= 0%]. According to interest rate parity, if the interest rate increase because of the greater demand for currency, such as a government deficit currency will rise against other currencies because it has a high real interest rate. However, if interest rate increase because of inflation, the currency will decrease to adjust the decline of its purchasing power (�gChapter 17�c�h). As I mention before, the U.S. is in the inflation, and Japan is no inflation and deflation. Therefore, the interest rate in the U.S. is not so high as people think because it does not consider growing inflation, and the interest rate in Japan is real because of almost no price change. What is more, the Japanese economy is becoming better, and the U.S. economy is falling because of the high interest rate. Therefore, even though the interest rate in Japan is lower than that in the U.S., more people would like to invest in Japan in comparison to the U.S. after considering the expectation toward Japan.

As you can see, the Japanese yen will clearly soar against the U.S. dollar in the near future. The first reason is purchasing power parity, and the dollar will lose its purchasing power because of inflation, but Japan will not today. The next point is the expectation toward the Japanese economic recovery makes investors give up the U.S. ballooned markets and invest in Japan. The strongest factor is the U.S. growing trade deficit will make the yen extremely stronger as Japanese economy becomes better. Therefore, I strongly recommend whoever wants to go to the U.S. in Japan to control the desire before the yen soars against the dollar in order to enjoy cheaper trips.

Works Cited

Beams, Nick. �gConflicts in G7 As World Economy Moves Closer to Slump.�h World Socialist Web Site. 23 Feb. 1999. 29 Sep. 1999. <http://www.wsws.org/articles/1999/feb1999/g7-f23.shtml>.

Rugman, Alan M., and Richard M. Hodgetts. International Business: A Strategic Management Approach. New York: Mcgraw-Hill, 1995.

�gBusiness Cycles in Japan Since 1945.�h Japan Almanac 1999. Chuo-ku, Tokyo: Asahi Shimbun Publishing Company, 1998.

Chandler, Clay. �gJapan Plans a New Push to Stimulate Its Economy.�h International Herald Tribune. 9-10 Oct. 1999: 1+.

�gChapter 17 Macroeconomic Links between Nation.�h ECO 101 Test Reviews & Helpful Hints for Spring 1999. 29 Sep. 1999. <http://www.mnsfld.edu/~busecon/yaco/eco101/test3rev.htm>.
�gConsumer Price Index.�h Economy at a Glance. 12 Oct. 1999. <http://www.bls.gov/eag.table.html>.
�gDollar Rises to Mid-\107 Level.�h Daily Yomiuri. 9 Oct. 1999: 12.
�gDow Industrials.�h Money.net. 13 Oct. 1999. <http://www3.money.net/moneynet/quote.asp? Mode=CHART&Symbol=$indu>.
�gDownward Price Rigidity of the Japanese CPI.�h Bank of Japan.
�gFred Bergsten dollar.�h 22 Sep. 1999. <http://www.internetional.se/bergsten9901.htm>.
Hager, George. �gIs U.S. Ready to Ride to Dollar�fs Rescue?.�h International Herald Tribune. 24 Sep. 1999: 13+.
�gNikkei Stock Average.�h 22 Sep. 1999. <http://www.boj.or.jp/en/down/long/data/hstock.txt>.

�gPrice Indexes/ text/ Wholesale Price Indexes, Corporate Service Price Index, Input-Output Price Indexes of Manufacturing Industry by Sector.�h Bank of Japan. 13 Dec. 1999. <http://www.boj.or.jp/down/down.htm>.
�gRelative Comparison of Dow Jones Industrial Average Index Performance in 1929, 1987 and 1999.�h 13 Oct. 1999. <http://members.xoom.com/mvadovic/dj.html>.
Sakamoto, Hirohisa. �gTankan Shows Sncrease in Business Optimism.�h Daily Yomiuri. 6 Oct. 1999: 12.
�gU.S. Economic Growth Slows in 2nd Qtr.�h Daily Yomiuri. 2 Oct. 1999: 13.

�gYen Drops As Japan Seeks Wider Intervention.�h International Herald Tribune. 18-19 Sep. 1999: 9.

�gYen Resumes Rise on Signs Economy Is Recovering.�h International Herald Tribune. 1 Oct. 1999: 15.

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