Sparking Yen

There have much of the sparks flowing between two of the biggest Asian economies recently. Owing to the financial hassle today more or less survival has become the basis to move on and all of the economies are struggling to do that. As most of the economies are keeping their currencies exceptionally undervalued to boost exports and make imports costly the question remain who ultimately will buy ? Since everyone is following the same, and is ready to sell, but no one is in, to buy it is difficult to predict the future.

Added to the situational paradox, there are financial hassles and problems where the economies are fighting with each other to survive. Chinese recently, started buying large chunks of yen from the market to push their values up. China and Japan both run an export driven economy and sustain it through artificial exchange rate manipulation. Recently as China released its grip over its currency by nearly 2% many of the international currencies like Yen have started threatening its market. This has led China to buy up large chunks of Japanese money to push their values up.

As the Japanese currency went up it might have benefited the Chinese, as the Americans now found it better to buy from China than Japan but it started hurting the Yen trade. For the past one month the value of the Japanese currency has been high and large amounts of its trade is being affected by it. Starting from a value close to 100 yen per dollar last year, it went down to a 15 year lowest value at 83. Japanese trade was literally wiped out as it continued to strengthen against the dollar.

As a result the Bank of Japan last week released a buffer package to cushion the deadly cycle that was troubling its trade. An amount to the tune of nearly 20 billion USD worth of Yen was released in the market last week to buy American treasury bonds to depreciate the value of Yen. Americans had till now been very concerned about the Chinese artificial manipulation but this is the first time a similar story related to Japan is coming out.

With such huge rate manipulations going around today, this does not seems to be a really big thing. But the question is would be a long term benefit? Obviously not. Likewise China, Japan will now have to keep buying American treasury bonds on a regular basis to keep the exchange rate fixed. Regarding benefitting this is just going to be a minute long story. Japan has used to artificially boost its exports for a very short period of time whose tunes are going to die very soon. It may affect Chinese sales to a certain limit but not to a larger extent. The main impact would be seen in a short while on how the Japanese government fairs in its own policies. On one side it is facing deflationary circumstances and huge unemployment and on the other hand a competent stage. The economics of the Japanese industries has still not left behind recession made bruises, and the country is diluting the currency to keep itself in a selling posture, but what will you give to your citizens when they are spending more to make something which you are deliberately trying to sell cheaply internationally.

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Protectionism Eat Out

Even though the global meltdown has left us two years ago, steady growth rates in any of the major economies still seem like a bleak opportunity. Countries which previously boasted of their mercantilism and free trade today have shrunk to the levels of protectionism. Previously America used to blame China for the same but today even America is practicing more or less the same. Heavy tariffs and import substitution through indigenous growth is hurting severely many of the emerging economies. The list includes the likes of India, China, and Brazil etc who along with materials also export services. The IT industry in India is down, situation at Bangalore looks gloomy and it would continue if against a democratic stalemate in the US, Obama would trade Indian outsourced jobs.

Protectionism is word that was coined at the time of Adam Smith when communities started imposing additional tariffs on goods that were brought in from other places or imported. The basic objective of the polity was to keep indigenous industries moving and to prevent any form of competitive heat it might feel at the hands of imports. Before the 2008 financial earthquake there were very few names on the table that used such measures to grow. Fingers were always pointed out to China which manipulated the exchange rate mechanism to increase exports and control imports.

China had the problem to feed its ever increasing problem and presence of a competition in its own market would have led to two problems: it would have to fight to feed its own people and the standard of living of the people would increase which is a negative sign when the government is fascist or communist. This was why is resorted to protectionist measures. Coming to today, various economies have taken to protectionism post the global meltdown. The question that is to answer is who is going to be benefitted from all this. Protectionism more or less works like a vicious circle in which government bodies enter in to control the system stability.

Suppose a nation tries to stop any form of imports but keeps on increasing exports to increase income, as is the case of all nations practicing the same, what will be the end like. If everybody wants to sell, and no one wants to buy, ultimately prices will slide. It is universal truth that ultimately the controlling behaviour will lead the customers back to a meltdown. Today most scrutinised and world leaders are leading the way to protectionism. They are definitely going to eat their way into the plates of developing economies.

Nearly 17 out the G 20 nations are imposing heavy tariffs on the countries with which they previously had study trade relations. Much of the services sector in most of the companies is on the rocks. It is not that protectionism is not good or indigenous growth should not be provoked but the gap in the plan is that it constricts free trade. Trade is an option to a business when it is ripe of fit to trade. Cases are coming where the quality of services and goods are going down with the protectionist ideology due to lack of competition.

Analysts like Alan Greenspan and Paul Krugman have been world champions against the practices of protectionism. German Chancellor keeps arguing how the world has submerged into debt. She keeps on telling how the world should and revive through free trade and build up of policies that would benefit both indigenous and foreign entities. However in a way she never acknowledges how Germany has fuelled the latest European financial breakdown. The cheap tax free export oriented German methods have made the entire European Union depended much on whatever it produces.

This has led to what we call a one sided cycle where in countries like Greece and Spain are taking loans from German banks to pay off on good brought from Germany itself and when they spiral into a debt closure they eventually end up paying the loans through debt issued by Germany itself.

Playing politics on the propriety is Obama who is gliding himself through the situation. First the American government through repetitive global pressure has forced volatility in Yuan exchange rates and made Chinese made goods finally a little costly. Added to this he is advocating his own people before the November polls by putting on trade restrictions on many Indian exported services. Lots of BPOs are going to go under the axe ones America decides to do all of it itself. There is little what we can see about the future but artificial impregnations in to the financial build up has always triggered fiscal pandemonium and each time a more striking one.

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