Global Finance Rules

Devaluation of YEN badly affects the Asian currency market

The devaluation of yen creates a big problem in front of every developing country in the Asia. China, India affected badly and it also affect the USA as Japan has 200 bn reserve of foreign currency and therefore any wrong step taken by the central bank of Japan will affect the economy of US.
The Japanese yen keeps falling, affecting business, trade and tourism in increasingly powerful ways. As Japanese officials systematically nudge their currency lower, the yen fell on Thursday to about 132 to the dollar, the 11th straight day of losses and the longest losing streak since 1971. The currency has lost nearly 7 percent of its value this month alone. On Jan. 3, 2000, the yen was at 101.45 to the dollar. Japan once again seems to be trying to fight its way out of a recession — its fourth in a decade — by devaluing its currency and therefore increasing exports. A cheaper yen makes Japanese products more competitive on world markets. Indeed, Tokyo’s stock market, which had slumped by about 25 percent since the start of the year, leaped 2.6 percent Thursday on news of the yen’s latest fall. Major exporting companies led the gains, as a weak yen instantly adds millions of dollars to the profit margins of major exporters like Honda Motor, Toyota Motor, Canon and Sony. But a weaker yen will also affect Japanese consumers, slowing a recovery of tourist visits to the United States and making imports more expensive. With imported beef costs rising, McDonald’s Japan operation announced last week that it was raising prices on some hamburgers. A weaker yen will add to mounting concerns among exporters, who fear that the dollar has become so strong that they are being priced out of many foreign markets. Automakers are especially sensitive to the value of the yen, particularly at a time of recession, when price competition has grown. But a wide range of manufacturers, like those that make appliances, electronic goods, steel and heavy equipment, see themselves as losing both domestic and overseas customers if Japanese companies gain a big price advantage. For months, as the currency crisis roiled markets across Asia, the Chinese renminbi remained an island of stability. Officials in Beijing brushed off any talk of devaluation, and their firm stance won much praise from central bankers worldwide.
Now, as Tokyo lets the yen slide, the Chinese suddenly are feeling queasy. Chinese exports to Japan and the rest of Asia have fallen, while domestic companies are fighting to stay competitive against a flood of cheaper imports. If Japan’s action starts a cascade of competitive devaluations across Asia, Beijing will come under pressure to let the renminbi slip. That would send the region’s economies into a free fall. ”Allowing the over depreciation of the Japanese yen is irresponsible,” says Sa Qi, head of the Bank of China’s research department.
China’s position is delicate. The economy is clearly getting hit by the new competition. But an about-face on the currency would cost new Premier Zhu Rongji much credibility as he pieces together his reform plans. It also would send the tightly linked Hong Kong economy into another tailspin. But most frightening for Beijing is the loss of confidence in the banking system currency devaluation would cause.
The devaluation worries come when unemployment is also a big concern. Economic growth could fall below 6.5% by yearend, nowhere near the official 8% target. China needs high growth to absorb the more than 5 million workers expected to lose jobs this year as its companies restructure

About : Raja CRN

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