COLA likely to remain lower in 2013 if weak yen predictions hold
January 9, 2013
YOKOSUKA NAVAL BASE, Japan — Servicemembers in Japan are seeing steep drops in their paychecks — at least partially offset by a boost in their off-base purchasing power — as the Japanese yen weakens, a trend that many economists predict will continue through the year.
The yen this past week has been trading at near 88 per dollar, a sharp decline from less than 80 just two months ago.
For many servicemembers, the stronger dollar probably isn’t offsetting the drop in cost-of-living-adjustment dollars they receive in their biweekly paychecks.
COLA is designed to make up for the higher prices servicemembers face in an overseas economy, as compared with prices in Washington D.C. The rate varies based on rank, family size and living circumstances, and is adjusted to compensate for currency fluctuations.
For example, a weaker yen means an E-5 stationed at Yokosuka Naval Base who is living off-base with two dependents will receive about $100 less in COLA during the first pay period of 2013, compared with two months ago.
Unless that E-5 regularly spends more than $1,000 a month off-base, the boost in purchasing power will not offset the loss in tax-free COLA.
While many servicemembers and Defense Department civilians are unlikely to do that much off-base spending, any civilians who receive COLA but do not get rent assistance have effectively received a raise as a result of the weakened yen.
Community Bank was selling yen at 86 per dollar as of Jan. 9, compared with 78 on Nov. 9.
Yuji Kameoka, chief foreign exchange strategist at Daiwa Securities Co., told Stars and Stripes this week that he expects the weaker yen to at least stay in its current range but that it also could drop into the mid-90s against the dollar later this year.
Analysts from Deustche Bank and Morgan Stanley also expect the yen to remain weaker later this year, according to a Financial Times report.
Newly elected Prime Minister Shinzo Abe has placed a weaker yen at the forefront of his plans to jump-start Japan’s stagnant economy, even if it means issuing billions more in debt than previous administrations. A weaker yen is generally good for Japan’s export-heavy economy because it makes cars, electronics and other consumer goods more affordable in other countries.
“It started off from the anticipation [of Abe’s policies], but other factors will continue to weaken the yen in the future,” Kameoka said.
If the U.S. and European Union economies improve, that could lead investors to invest in those markets and sell their yen, Kameoka said.
The U.S. Federal Reserve also indicated in recently that it would consider ending its $85 billion monthly bond purchases, which would strengthen the dollar against world currencies.