Yen

The peso gained significantly against the US dollar the past few trading days. As of Tuesday’s close, the peso stood at just under P45:$1.

The peso’s gains reflect a general retreat of the dollar against nearly all the world’s major currencies. The euro has recovered much of the ground it lost, climbing up from about $1.19:    1 to about $1.32:   .

The decline of the dollar is usually accompanied by a rise in the dollar price of crude oil in the world market. This is the reason oil remains expensive even as currencies gain against the dollar. Last week, oil prices climbed to $82 per barrel, triggering the latest round of fuel price increases here.

 A great number of Filipinos celebrate any sign of the peso’s strengthening. It is sometimes interpreted as a measure of our economic improvement. Surely, it helps bring down the peso prices of imported consumer items.

 Two vital sectors of our economy, however, are always alarmed by any gain in the peso’s exchange value. These two sectors are: our exporters and our expatriate workers.

 Our exporters fear a strong peso will weaken their price competitiveness in foreign markets. For our expatriate workers, a strong peso means they will have to send more in foreign currency for the same amount of peso remittances. A few years ago, when the peso clawed its way back to about P42:$1, our expatriate workers were up in arms. They had to be assuaged by means of a peso hedging facility offered by DBP.

 The last time we intervened heavily to keep the peso strong was in the mid-nineties. The peso-dollar exchange rate then seemed impervious to volatilities in the global currency markets. But we paid a heavy price for maintaining an overvalued currency. We were completely vulnerable to the Asian financial meltdown of 1997, which cut the peso’s exchange value in half.

Normally, a strong peso is maintained by raising domestic interest rates. But that instrument is double-edged. A comparatively high domestic interest rate regime chokes investments at home. An overvalued currency also undermines export growth, thereby denying the domestic economy gains in employment and productivity. That negates any gain from having a stronger currency.

 The US has accused China, for instance, of undervaluing its currency in order to win even more export markets. Over the past few months, pressure has been building up on China to allow its currency to appreciate. Beijing has promised to do so but has done very little to see the yuan find its right level given the country’s strong exports and humungous foreign currency reserves. Any slight appreciation of the yuan will shrink the comparative value of its reserves.

 One nation that finds its strong currency particularly problematic is Japan.

Over several years, the yen gained heavily against the dollar. It likewise gained against all other currencies. Many of us still recall the time when a dollar could buy well over ¥200. Today, a dollar is worth only ¥86.

Japan, of course, built its economy on decades of a weak currency. That enabled Japan to flood the world with its exports.

With its very strong currency at present, Japan’s main exports have become uncompetitive. Its auto export juggernaut has lost much ground to Korean automakers. Its large electronic export industries are likewise losing ground.

 Forget about buying Japanese foodstuff. Go try and find equivalent items in the nearest Korean grocery outlet.

 The strong yen is like a heavy stone around the neck of the Japanese economy. Receding export markets have brought Japan Inc. screeching to a halt. Her economy has remained stagnant. Although there are a few feeble signs of recovery from recession, the second most important industrial economy in the world teeters in the brink of deflation.

Deflation, when the prices of domestic commodities recede, rewards the last consumer to buy. This is unlike an inflationary situation where the first to buy enjoys an advantage. A deflation, therefore, could result in a whole economy freezing up as consumers hold on to their appreciating money rather than buy cheapening goods with them.

 This is exactly Japan’s problem. Its savings rate continues to rise as consumers simply refuse to spend their money.

Japan’s economic managers tried using interest rates to stoke consumer spending. But at an interest rate regime that is close to zero (0.1%), there is not much wiggle room left to use interest rates to coax up consumer activity.

This is Japan’s dilemma: having dropped interest rates to the minimum imaginable, the country’s currency continues to strengthen. What else could be done? Charge savers a fee for depositing their money in banks rather than pay them an interest rate?

 It does not help that Japan’s aging demographics encourages a high savings rate. Fully built up infrastructure confronts Tokyo’s economic managers with a problem: where to spend money on?

 What Japan can do is to flush out its savings by encouraging yen investments migrating abroad. But that could push the economy into a recession at home with factory shutdowns and immense job losses.

 Filipinos, long used to high inflation and a constantly depreciating currency, might find it hard to sympathize with Japan’s yen problems. But we do court problems if our currency appreciates too much — problems that resemble what Japan has to deal with.