Country: Japan
Trends Effect to the country
World’s movement toward electric
vehicles to combat climate change
Currency Exchange Rate
Fluctuation of Oil Price
Contribution to the trend
Electric vehicles use one-third fewer
parts than in gas-powered vehicles. It
will most likely hurt the economy of
Japan. Japan’s government wants
manufacturers to stop building
conventional cars by 2050
U.S. small businesses that trade with
Japan may be puzzled by recent
behavior of the dollar-to-yen
exchange rate vis a vis Japanese
inflation. For the first three months of
2018, Japan's inflation rate slowly
rose, even though the U.S. dollar
currency exchange rate was
weakening versus the yen. Although
inflation was still far below the Bank
of Japan's 2 percent target, the
upwards trend caused analysts to
speculate that the Bank of Japan
might start to dial back its
quantitative easing (QE) program and
consider raising interest rates. In
March, however, the dollar-to-yen
foreign currency exchange rate
strengthened. At the same time,
Japan's inflation rate dipped, falling
to 1.1 percent year-on-year.
Crude oil prices began rising in 2004,
reaching a new high of US$42.33 per
barrel in June. The effect on the
Japanese economy cannot be ignored
because of Japan's heavy
dependence on overseas supplies.
The Japanese economy's ability to
withstand a rise in crude oil prices,
however, is stronger than in the past.
First, Japan has a sufficient stockpile
of crude oil; second, its dependence
on crude oil has declined along with
diversification of energy sources; and,
Japan's largest exports are
automobiles and parts, steel
products, and semiconductors that
uses gas-power.
As the interest rates of the two
countries gradually diverge, there is
an incentive for banks and traders to
borrow in yen and lend in dollars,
profiting from the widening spread.
This is known as a "carry trade," and
it affects currency exchange rates.
The theory of "uncovered interest
parity" says that the dollar-to-yen
exchange rate should adjust to
eliminate the profits arising from
interest rate differences. But the
foreign exchange component of a
dollar-yen carry trade involves selling
yen and buying dollars, which tends
to depress the yen's exchange rate
and strengthen the dollar. If carry
trades are reappearing, the yen's
exchange rate could weaken
irrespective of the direction of
Japanese inflation, provided that
Japanese interest rates remain well
below U.S. levels. This could perhaps
help to explain the yen's fall in March.
If currency exchange rates are
influencing inflation with a time
delay, then carry trades could help to
raise inflation via import prices
Japan has reached the limits of
conventional macroeconomic policy.
In order to overcome deflation and
achieve sustainable economic
growth, the Bank of Japan (BOJ)
recently set an inflation target of 2%
and implemented an aggressive
monetary policy (incorporating
energy prices) so this target could be
achieved as soon as possible.
Although prices started to rise after
the BOJ implemented monetary
easing, this may have been for other
third, Japan's energy consumption
structure is dramatically more
efficient now than during the
previous oil crises. Japan's crude oil
imports come mainly from the Middle
East and costs less than West Texas
Intermediate (WTI).
reasons, such as higher oil prices. Oil
became expensive as a result of the
depreciated Japanese yen and this
was one of the main causes of the
rise in inflation.