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USD and Japanese Yen

Some economics.

 

http://finance.yahoo.com/currency/convert?amt=1&from=USD&to=JPY&submit=Convert

 

When I left Japan about 2 months ago, Yen was getting appreciated against USD. It even once hit under 100 yen. I was surprised to know that now, it is about 1USD=108Yen. When I was in USA about 2months ago, I noticed that prices have gone up a lot compared to the period I visited USA in 2003. Meanwhile, the price level in Japan remained about the same in the last five years. Actually, we suffered from deflation, but to make things simple, let us assume that the price level in Japan remained exactly the same. Now, suppose that a 350ml Coca-cola costed 1 dollar in USA five years ago, but now costs 1.20 dollar, because of inflation. But in Japan, its price was 120yen and still 120yen now.

 

Everything is set now. If the same product ( we call it ”goods” in Economics) has only one price, the exchange market should be determined as follows in these two periods.

 

*Five years ago

1dollar=120yen

 

*Now

1dollar=100yen

 

An attempt to explain exchange market based on price levels is called PPP(Purchage Parity Power) theory in Economics. The theory is just saying that there should be one price for one goods.

 

There wasn’t and isn’t (and probably will not be for another couple of years ) an inflation in Japan, I think it is natural that there has been an Yen appreciation trend. I think this trend will continue for another couple of years. I am not sure, but I think this year or next year, it will hit under 100yen again, and reach to about 90yen within 3 years.

 

But you should understand that this is not because Yen is appreciated; it is because Dollar is deppreciated (i.e, the value of  one dollar is decreasing because of inflation).

 

I dont know why it went back to 108 yen from 100yen in the past one or one and an half month, because i am currently not reading any japanese news. But I suppose there should be some financial news that led to this result.

 

If I were somebody in charge of finance at exporting company (like Toyota), I would probably move to hedge this yen appreciation risk.

 

 

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