Falling Yen’s Effect On International Currencies

Reuters reported that Japanese currency’s continuous deflation affecting other Asian country’s currency value, import and export trade.

The continuous falling of Japanese yen makes Asian countries such as South Korea, India and Indonesia’s economies uncompetitive which might cause currency war. Other countries let their currencies go down in order to support their own economies.

Currency war is also known as competitive devaluation, is a condition wherein countries compete against each other in order to achieve low exchange rate for their own currency.

The word war gives us the notion about something negative. But in fact, currency war has a lot of advantages. Japanese yen’s continuous devaluing forces other countries to lower their exchange rates. This is because lower exchange rates would mean cheaper products and high export rates, and more competitive exports means more transactions. In order to have exports, other countries devalue their currencies too. This happens because of Economic pressure.

Exporters have benefited from the effect of falling yen, but such benefits that are only enjoyed by larger exporters, such as automakers. It is widely expected that this matter will help to boost the economy by making Japanese products cheaper overseas. However, smaller firms could suffer because they have to pay more for imported materials.

Prolonged currency war would not give a relative advantage to the countries but will help in developing stability in the world money supply. Expansion of worldwide money supply and low interest rate would mean more consumption, more investment, and more international trade.

Like any other wars, this also has downsides. No country would gain real profit from the export trades. This is because countries lower their currency values just to be in line and to be able to compete with other countries’ value. Also, one of the hardest problems that might come up during this stage is the need to print more money. Devaluing currencies would mean that there is no enough supply of money in order to control the economy.

Some experts compare this situation with what happen with Asian currency crisis in 1997. During that time, yen was devaluing; there were highly uncompetitive exchange rates, and current account deficits. However, Asian countries have higher currency reserves compared with 1997 currency war, making it easier for Asia to cope with weaker currencies.

India and Thailand are making their efforts to lower down their rates while South Korea still lacks tools to push their won down like yen.

According to Gaurav Saroliya, a macro strategist at London-based Lombard Street Research, a lot of these countries are facing a double whammy of poor exports because of a very uncompetitive exchange rate.