Exchange rate and Macroeconomic variables in Japan
Canon Incorporation, as multinational enterprise, the company uses various Balance of Payments (BOP) measures to gauge the growth and health of specific types of international trade or financial transactions by countries and regions of the world against the home currency (domestic and foreign). The BOP is an important indicator of pressure on a country’s foreign exchange rate, and thus on the potential for a firm trading with or investing in that country to experience foreign exchange gains or losses. BOP of Japan experiencing a good trade surplus is likely to expand exports. It may, however welcome investments that increase its exports.
The overall balance in the BOP is of particular significance because of its effect on official reserves. A net credit balance (year 2005-2009) indicates demand for the home currency is strong so its value will rise if the government does not intervene to supply additional currency. The overnight rate is the overnight interest rate set by Bank of Japan used for monetary policy direction. It is the target rate for the day to day liquidity operation of the Bank of Japan. The interest rates of overnight rate at 0.25% (year 2006), the overseas countries provided attractive interest rates rather than the lower rates in Japan are the factors that net portfolio investment and net foreign direct investment flows into Japan decreases. While, there is no effect to the business operation of Canon Incorporation in Japan although there is a huge drop in the foreign investment into Japan. Besides that, capital flow restriction that imposed by Japan government on net portfolio investment and net foreign direct investment mainly affects the investors’ decision making. The enormous drop in percentages shows that investment capital flows into Japan are restricted and the economic growth was affected. As a result, total assets of Canon Incorporation drop by JPY3, 847,557 but shareholders’ equity also increase by JPY 2,688,109 from year 2008 to year 2009. However, the company’s share price and operating profit still decrease.
The investment climate is also a very important factor to sustain and generate economic growth. The increasing mobility of capital flows across borders, facilitated by the more liberal investment regime, globalization as well as ICT necessitated that economies pay special attention to providing at least the basic facilities required to retain and attract new business activities. By increasing competition for FDI, resulting from the slow growth in FDI from source countries coupled with increased demand for such flows from new and emerging market economies in recent years, the basics will just not be enough. Countries are coming under increasing pressure to go beyond the basics to provide highly attractive fiscal and non-fiscal incentives to attract potential investors and even retain those who are already in the country. However, in trying to outbid one another, the capital recipient countries have to be cautious that they do not fall into a trap ala a `price war’ which could ultimately reduce the returns from such capital flows for all involved.
On the other hands, Japan’s decision in mid-2005 to move off the fixed peg for the yen allowed some flexibility in monetary policy in 2006. The smooth shift to a managed float from a US dollar peg and the steady appreciation relative to the US dollar have enhanced the credibility of the monetary authorities and reduced market concerns of sudden currency revaluations.
The Japanese economy is very dependent on importing and exporting goods and services. Nearly all of their natural resources, such as oil are imported and a large portion of their businesses’ products/services are exported. As a result, the Bank of Japan used to peg the Yen to the U.S. Dollar at a fixed rate in order to remain competitive in their exporting operations. Eventually, they allowed the Yen to float, but are still known to occasionally intervene in the Foreign Exchange Market and artificially manipulate the price of the USD/JPY. In the past, traders have taken advantage of their intervention and reaped tremendous profits, so it is important to follow the press releases of the BOJ for any hint of intervention.
Also, the BOJ’s interest rate decisions have a profound effect on the Yen’s exchange rate. For example, if the BOJ decides to raise the interest rate, then returns on Yen assets will appear more favorable to investors and the Yen will appreciate in value. This will create a situation where imports are cheaper for Japanese citizens and their exports become more expensive to the rest of the world. Currently with interest rates at 0%, Japanese investors are some of the largest investors in foreign securities (in a recent quarter they purchased billion worth), but if returns in Japan were to increase, then investors will be more inclined to sell their foreign assets and purchase domestic ones. On the other hand, if the BOJ chooses to lower the interest rate, then Yen assets will not be as appealing to investors and the Yen will depreciate in value. This scenario causes imports to be more expensive for Japanese citizens, but their exports become more appealing to other nations. Currently, this scenario is impossible because interest rates are at 0%.
Japan’s debt has come under more scrutiny since Standard & Poor’s cut its outlook on the nation’s AA sovereign rating in January, a move Sengoku described at the time as a “wake-up call” to repair the nation’s finances. The country’s debt-to- GDP ratio is approaching 200 percent, the highest in the Organization for Economic Cooperation and Development. Japan’s primary fiscal deficit will probably narrow to 7.1 percent of gross domestic product in the year ending March 2011, Fiscal policy has balanced meeting a longer-term goal of cutting government borrowing with a more immediate concern of encouraging growth. As a net hydrocarbons exporter, high international energy prices provide a cushion for government spending.
The exchange rate between yen and US dollar had been appreciated over 5 years. When government change the fixed exchange rate system to managed floating rate system, yen was appreciated against the US dollar which is JPY 88/$ in year 2010. As a result, the strong home currency will increase the purchasing power parity in Japan. Thus, demand will increase in Canon products and drive up the profit. In year 2005, due to the appreciation of yen, Canon imports the raw material from foreign countries that the prices are more competitive with the local price. Consequently, this reduces the cost of the company and increase the profit (JPY31, 848 to JPY 45,095).
The main objective of Japan’s macroeconomic policy is to predict the consequences of a monetary stimulus consisting of an open-market purchase of government bonds by the Bank of Japan combined with the announcement and implementation of inflation targeting in Japan. It also predicts that monetary policy would be effective in stimulating the Japanese economy through causing a depreciation of the yen.
Japan has reduced its fiscal deficit from 8.2% of GDP in 2002 to around 4% in 2007 (on a general government basis excluding one-off factors), with the improvement divided almost equally between spending cuts and revenue increases. Government expenditure has fallen in nominal terms, primarily as a result of continued declines in public investment and the public-sector wage bill, although this has been partially offset by increased social security spending in the context of population ageing. On the revenue side, the government phased out the temporary income tax reduction and raised social security contributions, but a significant share of the increase in revenue was due to the economic expansion. Overall, about one quarter of the decline in the budget deficit since 2002 is explained by cyclical factors. On a primary budget basis, the deficit fell at an annual pace of around ½ per cent of GDP, adjusted for cyclical factors, between 2002 and 2007.
Although the persistently high oil prices and the downturn in the global electronics cycle, real gross domestic product (GDP) of Japan in year 2005 was expanded by 2.9%. Growth was private-sector driven and was underpinned by supportive macroeconomic policies and favorable financial conditions. Private consumer demand on Canon products & services was sustained at a strong pace while the resilience in private investment further supported economic expansion. The public sector continued to take the opportunity of a favorable environment to consolidate its finances to more sustainable levels.
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