Dollar expected to remain strong against yen as Japan's economic reforms kick in
By Wayne Specht, Stars and
Stripes
Servicemembers may
benefit from a weaker yen; experts predict the dollar may fetch as much as 145 yen. |
There could be good news for servicemembers and Defense Department
employees stationed in Japan.
Some Tokyo currency dealers predict the U.S. dollar may fetch as much
as 145 yen under Japanese Prime Minister Junichiro Koizumi’s plans to jump-start the
country’s stagnant economy.
Vaguely described as potentially “painful” reforms, Koizumi
has been telling Japanese residents to be ready to endure difficult times.
In the past several months, the dollar has strengthened against the
Japanese yen, approaching the 125 yen-to-a-dollar level several times.
One year ago, the yen was mired at 107 to a dollar.
But there is a downside to a great dollar to yen exchange rate.
Whenever the dollar significantly appreciates against the yen, (a 5
percent threshold is the common denominator) the Defense Department’s Per Diem and
Transportation Allowance Committee adjusts overseas housing allowances and the State
Department adjusts per diem rates at overseas locations.
This is done as a way of maintaining purchasing power over local
currencies.
Shoichi Sakato, currency dealer at Tokyo’s Toyo Trust and
Banking Co., expects the dollar to range between 115 to 135 yen for the next year or two.
“A reasonable level is around 130 to the dollar [since] sharp
increases or decreases do not benefit the U.S. or Japan,” he said.
Imagine beer at $26 bottle
Expatriates who have been kicking around Japan for a
while can remember when the exchange rate was a fairly stable 360 yen to the U.S. dollar.
It was pegged at that rate between 1949 and 1970 under
Japan’s Foreign Exchange and Trade Control Law of 1949, according to the Kodansha
Encyclopedia of Japan.
The greenback began its tumble in 1971 when President
Richard Nixon announced plans to visit the People’s Republic of China after
consulting the Japanese. A month later, the U.S. abandoned the $35 an ounce gold standard.
Exchange rates dropped to 315 to the dollar at the end of that year.
In 1973, the dollar came under pressure as foreign
governments adjusted exchange rates against the increasing price of gold and a worldwide
oil shortage.
The yen joined major world currencies in a floating
exchange rate system that year. It bottomed out at 280 to the dollar by the end of that
year.
On April 19, 1995, the exchange rate sank to a meager
81 to the dollar. It has since strengthened as Japan’s economy continues to be
hammered by a decades-long slump.
The Asian Wall Street Journal said from a historical
perspective, today’s dollar to yen exchange rate is more than 60 times higher than
the record low rate.
U.S. Federal Reserve System data indicates the
exchange rate was a whopping 1.88 yen to the dollar in 1918.
At that rate, today’s 500 yen bottle of Kirin
beer would cost $26.60 a bottle and a six-pack of Coca Cola $38.29.
— Wayne Specht |
He said weak yen is good for Japanese exports.
Conversely, a stronger dollar hammers U.S. exporters, making U.S.
imports more costly in Japan.
Daisuke Uno, of Sumitomo Mitsui Banking Corp., told Kyoto news
service if Koizumi’s economic reforms take root over the next two years, the yen
could weaken to 145 to a dollar.
The last time it exceeded that was Aug. 12, 1998 when the yen was
exchanged at 146 to the dollar.
“Since his plan presupposes that Japan will have to accept very
low levels of economic expansion over the next two or three years, it could provide the
rationale for generating a fall in the yen’s value,” he said.
Koizumi was swept into power last April declaring the only way to
elevate the nation’s economy is by reducing spending on public works projects by
limiting government bond issues.
He also wants to examine practices dealing with money allocated for
overseas development programs, to privatize the postal system, and eliminate pork barrel
policies that dispenses money to Japan’s 47 prefectures.
Japan is mired in its worst recession since World War II as
debt-ridden banks scale back on lending, starving companies of cash. Many financial
institutions are now struggling to write off massive amounts of bad loans left from the
late 1980s.
The gloomy economic picture has prompted Japanese consumers to
tighten their purse strings.
For the past several years, sales of domestic automobiles and large
appliances have been slow with many corporations reporting deficits in quarterly and
annual sales reports.
Tokyo’s stock exchange dropped below the 12,000 mark on Monday,
a level not seen in the last seven years.
Because Japan’s economy is so closely linked to the United
States that a softening of the American economy also is tugging at Japan’s recovery
plans.
On Sunday, Japanese voters go to the polls in a House of Councilors
election.
“A slowing U.S. economy keeps the dollar strong,” Sakato
said. “If reform slows down following [Sunday’s] election, the stronger dollar
and weaker yen [relationship] will remain unchanged.”
Sakato added if Koizumi’s reforms show progress, the yen could
strengthen in two years.
Naoko Sekioka and the Associated Press contributed to
this report.
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