Following the devastating tsunami, the Bank of Japan began injecting billions of dollars into its beleaguered economy, in addition to lowering interest rates. The intended purpose of these maneuvers was to reverse the economic recession gripping Japan. On the other side of the world in Mexico, Gruma SAB, the world's largest producer of tortillas, has experienced extreme volatility in its stock price over the past few weeks, brought on by lower-than-anticipated annual revenue. Some analysts have even recommended against buying Gruma shares, a recently risky investment.
The events in Japan and Mexico may seem unrelated, but relationships between global economies are often difficult to spot. Lowering the borrowing rate and buying back government-issued bonds allowed the Japanese to create a vast surplus of yen, intending to stimulate the economy and halt deflation. By increasing the amount of yen in circulation, the Bank of Japan is decreasing the value of the yen in relation to other currencies. Devaluing a currency encourages export and domestic production growth because domestic goods become 'cheaper' to produce.
Gruma SAB's market fluctuation is rooted in Venezuela's recent currency devaluation. Venezuela accounted for 16% of Gruma's total revenue in 2011; however, the currency devaluation makes that same 16% worth less than before. Although the currency devaluation was not intended to hurt Gruma SAB, or other international businesses, the Venezuelan import sector will suffer as goods become more expensive.
Much of the financial policy used to devalue currency is enacted through domestic legislation, but the nature of our increasingly interconnected global economy dictates that small splashes are capable of generating big waves. The G-20 is a group of finance ministers and central bank officials from the world's twenty largest economies. Its intended goal is to facilitate economic communication between countries and "ensure global economic stability." On Saturday, the organization issued a statement promising to ". . .refrain from competitive devaluation" and ". . .not target our exchange rates for competitive purposes." The statement brought to light growing concern for the possibility of a 'currency war,' a conflict between two countries that continuously devalue their currency against their rival.
The economic relationship between China and the United States is of primary importance to each country, but bilateral diplomacy has been rocky over the past several years. The United States has accused China of intentionally devaluing its currency, at the cost of US domestic production growth. The protests culminated in the filing of a formal complaint with the WTO that accused China of illegally subsidizing auto exports. China replied that the allegations were baseless. The future of the trade dispute is unclear, but there is no doubting the dependency that each nation has on the other.
Currency devaluation can be good for domestic growth in the short term, but it hinders global economic development. Japan is using it as a tool to help restore economic greatness, but the misfortune of Gruma SAB cannot be ignored. Devaluation is a double-edged sword, but with careful oversight, economic stability is obtainable.
The events in Japan and Mexico may seem unrelated, but relationships between global economies are often difficult to spot. Lowering the borrowing rate and buying back government-issued bonds allowed the Japanese to create a vast surplus of yen, intending to stimulate the economy and halt deflation. By increasing the amount of yen in circulation, the Bank of Japan is decreasing the value of the yen in relation to other currencies. Devaluing a currency encourages export and domestic production growth because domestic goods become 'cheaper' to produce.
Gruma SAB's market fluctuation is rooted in Venezuela's recent currency devaluation. Venezuela accounted for 16% of Gruma's total revenue in 2011; however, the currency devaluation makes that same 16% worth less than before. Although the currency devaluation was not intended to hurt Gruma SAB, or other international businesses, the Venezuelan import sector will suffer as goods become more expensive.
Much of the financial policy used to devalue currency is enacted through domestic legislation, but the nature of our increasingly interconnected global economy dictates that small splashes are capable of generating big waves. The G-20 is a group of finance ministers and central bank officials from the world's twenty largest economies. Its intended goal is to facilitate economic communication between countries and "ensure global economic stability." On Saturday, the organization issued a statement promising to ". . .refrain from competitive devaluation" and ". . .not target our exchange rates for competitive purposes." The statement brought to light growing concern for the possibility of a 'currency war,' a conflict between two countries that continuously devalue their currency against their rival.
The economic relationship between China and the United States is of primary importance to each country, but bilateral diplomacy has been rocky over the past several years. The United States has accused China of intentionally devaluing its currency, at the cost of US domestic production growth. The protests culminated in the filing of a formal complaint with the WTO that accused China of illegally subsidizing auto exports. China replied that the allegations were baseless. The future of the trade dispute is unclear, but there is no doubting the dependency that each nation has on the other.
Currency devaluation can be good for domestic growth in the short term, but it hinders global economic development. Japan is using it as a tool to help restore economic greatness, but the misfortune of Gruma SAB cannot be ignored. Devaluation is a double-edged sword, but with careful oversight, economic stability is obtainable.
I wonder if the argument for the promotion of free trade would work in this situation. This is a hypothetical situation, but what if a country which is very protectionist decides to pursue more free trade, but compromises by devaluing their currency. Can we still say that free trade is mostly beneficial to all parties?
ReplyDeleteThe above argument is definitely an interesting one, however I think that if a country in Japan's situation can certainly stand to benefit from its devaluation. Its economy had been stagnant for quite some time, the Fukushima disaster now forces Japan to import huge amounts of its energy and if it can somehow bolster its economy it can only be to the benefit of all.
ReplyDeleteIn determining the effectiveness of devaluing currency one must also look at the economic goals of the country. China devalues their currency because they are an export based economy and having a devaluated currency is more beneficial to their exports. The USA criticizes this practice but in reality they rely upon China's devalued currency for cheap imports. Without a cheap Chinese currency China and US trade relations would deteriorate due to the fact that the USA values cheap Chinese labor/goods. Even at the cost of domestic production, the USA is getting a cheaper good that would never be that cheap if produced locally. These products, if made in the USA, would create jobs but also raise the price of the good. It seems this is merely a political ploy to satisfy domestic voters who care about domestic jobs. Perhaps the USA should focus on creating more specialized jobs which would allow for better domestic production with higher wages.
ReplyDeleteI completely agree that devaluation is a double edged sword, it has the ability to increase foreign exports but also can have negative impacts on the domestic economy. I also agree with Kayla in that we accept China's devaluation of currency because we are able to purchase products much cheaper. If goods were produced in the United States, they would be much more expensive and people would consume less.
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