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The dollar has taken a breather, slipping slightly against the yen. I predicted in this column a month ago that the dollar would hit 130 yen in a month or two. My prediction has turned out to be wide of the mark. Having hit 126 yen early this month, the dollar is now hovering around 123 yen.

The yen’s steep fall against the dollar in recent months set off a fierce outcry from Japan’s Asian neighbors. In only six months, Southeast Asian currencies have risen 10 percent to 15 percent against the yen, undermining the competitive position of exporters in the region. The yen’s weakness has hit manufacturers in South Korea, Taiwan, Hong Kong, Singapore and other newly industrializing economies that compete directly with Japanese firms on export markets.

While the currencies of Hong Kong, China and Malaysia are linked to the dollar, Singaporean and Thai exporters, for example, have benefited from the recent falls of their currencies. The Thai baht has plunged 4 percent against the dollar in the past six months and the Singaporean dollar has declined 3 percent. This, however, made imports costlier in dollar terms, inhibiting monetary authorities from easing their grip on credit for fear of inflation.

In the case of the Chinese renminbi, the situation is more complicated. Despite the 1997 Asian currency crisis, Southeast Asian countries have benefited politically and economically from Peking’s policy option not to devalue its currency. Recently, however, Chinese monetary authorities have indicated they would devalue the currency if the yen weakens beyond 130 to the dollar. This was indicated by representatives from the Bank of China at a recent Japan-China monetary forum. Devaluation of the renminbi when world economies are reverberating from the U.S. economic slowdown would undoubtedly pose a serious threat to Southeast Asian economies.

If Japan expects the yen to weaken further while its economy is in fairly good shape, that’s taking too much for granted. Until Japan’s structural reforms begin to make headway and their adverse impact on the economy becomes discernible, the yen is not likely to weaken to 130 to the dollar.

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