The Nonlinear Library LW - on the dollar-yen exchange rate by bhauth
Apr 8, 2024
16:39
Welcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: on the dollar-yen exchange rate, published by bhauth on April 8, 2024 on LessWrong.
Recently, the yen-dollar exchange rate hit a 34-year low. Why is that?
6-month US Treasuries are paying around 5.3% interest. Japanese government bonds are paying about 0%. That being the case, you can borrow yen, trade it for dollars, buy US bonds, and get more interest. That's called a "yen carry trade". The risk you take in exchange for that money is that the exchange rate will shift so that a dollar is worth less yen.
But of course, it's also possible that the exchange rate will shift in the other direction, and that's what's happened recently. From 2020 to now, $1 went from 105 to 150 yen.
That being the case, I'd normally expect inflation to be higher in Japan than the US - their currency became less valuable, which makes imports more expensive. Yet, that's not what happened; inflation has been higher in the US. In Japan, you can get a good bowl of ramen for $6. In an American city, today, including tax and tip you'd probably pay more like $20 for something likely worse.
The PPP / nominal GDP of Japan is now ~1.5x that of the US, and I'd argue that's actually an underestimate: PPP estimates don't account for quality of services, and a lot of Japanese services are higher-quality than their US equivalents. But that's not to say I envy how the economic situation of people in Japan has changed. While inflation was lower in Japan than America, wages barely increased, and real incomes of most Japanese fell.
In some countries, you can argue that crime or lack of property rights or inadequate infrastructure keep labor values down, but that's not the case for Japan. So, we're left with some questions.
Question 1: Why would an hour of labor from an American be worth 2x as much as an hour from a Japanese employee?
I remember talking to an economist about this once, and he said, "that means Japanese labor is just not as good as American labor" - but he was just wrong.
(He didn't even consider the possibility that Japanese management culture was the problem, because obviously inefficient companies would just get outcompeted.) There's something about a lot of economists where, when they have some model and reality disagrees with them, they seem to think reality is wrong, and aren't even inclined to investigate.
I'll have to get back to this later.
Question 2: Why do Japanese automakers operate some factories in America instead of importing everything from Japan?
I can answer this one:
Direct labor is generally <20% of the cost of a car, and a lot of components can be imported from other countries.
Shipping a car to the US from Japan costs maybe $1000.
For US imports from Japan, there's a 2.5% tariff on cars and 25% on trucks. Trucks make up the majority of Ford's profits; they basically can't make a profit when competing with Japan with no tariff.
Most of the US factories were built decades ago, and new factories are being made in Mexico instead.
Question 3: Why can the Japanese government keep borrowing money with no interest?
That debt is funded largely by bank deposits from Japanese citizens. I asked a Japanese guy I know why people don't put their money in something that yields more interest, like US bonds, and he said:
Japanese people think of investments as having risk, and bank deposits as being safe. They don't really understand that their bank deposits aren't inherently safer than some other things.
Question 4: If dollars are overvalued, why does America have any exports?
A lot of US exports are currently oil and gas products, which are natural resources being used up. I personally think the US government should tax the extraction of natural resources, because they have some value that should be collectively owned by the population, but that's another topic.
How about food exports? S...
Recently, the yen-dollar exchange rate hit a 34-year low. Why is that?
6-month US Treasuries are paying around 5.3% interest. Japanese government bonds are paying about 0%. That being the case, you can borrow yen, trade it for dollars, buy US bonds, and get more interest. That's called a "yen carry trade". The risk you take in exchange for that money is that the exchange rate will shift so that a dollar is worth less yen.
But of course, it's also possible that the exchange rate will shift in the other direction, and that's what's happened recently. From 2020 to now, $1 went from 105 to 150 yen.
That being the case, I'd normally expect inflation to be higher in Japan than the US - their currency became less valuable, which makes imports more expensive. Yet, that's not what happened; inflation has been higher in the US. In Japan, you can get a good bowl of ramen for $6. In an American city, today, including tax and tip you'd probably pay more like $20 for something likely worse.
The PPP / nominal GDP of Japan is now ~1.5x that of the US, and I'd argue that's actually an underestimate: PPP estimates don't account for quality of services, and a lot of Japanese services are higher-quality than their US equivalents. But that's not to say I envy how the economic situation of people in Japan has changed. While inflation was lower in Japan than America, wages barely increased, and real incomes of most Japanese fell.
In some countries, you can argue that crime or lack of property rights or inadequate infrastructure keep labor values down, but that's not the case for Japan. So, we're left with some questions.
Question 1: Why would an hour of labor from an American be worth 2x as much as an hour from a Japanese employee?
I remember talking to an economist about this once, and he said, "that means Japanese labor is just not as good as American labor" - but he was just wrong.
(He didn't even consider the possibility that Japanese management culture was the problem, because obviously inefficient companies would just get outcompeted.) There's something about a lot of economists where, when they have some model and reality disagrees with them, they seem to think reality is wrong, and aren't even inclined to investigate.
I'll have to get back to this later.
Question 2: Why do Japanese automakers operate some factories in America instead of importing everything from Japan?
I can answer this one:
Direct labor is generally <20% of the cost of a car, and a lot of components can be imported from other countries.
Shipping a car to the US from Japan costs maybe $1000.
For US imports from Japan, there's a 2.5% tariff on cars and 25% on trucks. Trucks make up the majority of Ford's profits; they basically can't make a profit when competing with Japan with no tariff.
Most of the US factories were built decades ago, and new factories are being made in Mexico instead.
Question 3: Why can the Japanese government keep borrowing money with no interest?
That debt is funded largely by bank deposits from Japanese citizens. I asked a Japanese guy I know why people don't put their money in something that yields more interest, like US bonds, and he said:
Japanese people think of investments as having risk, and bank deposits as being safe. They don't really understand that their bank deposits aren't inherently safer than some other things.
Question 4: If dollars are overvalued, why does America have any exports?
A lot of US exports are currently oil and gas products, which are natural resources being used up. I personally think the US government should tax the extraction of natural resources, because they have some value that should be collectively owned by the population, but that's another topic.
How about food exports? S...