Murra, Gene

Sondey, John

English

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South Dakota State UniversityOpen PRAIRIE: Open Public Research Access InstitutionalRepository and Information ExchangeEconomics Commentator Economics4-25-1994The Price of the Yen: Does it Matter?; SlaughterCattle OutlookJohn SondeySouth Dakota State UniversityGene MurraSouth Dakota State UniversityFollow this and additional works at: http://openprairie.sdstate.edu/econ_commPart of the Agricultural and Resource Economics Commons, and the Regional EconomicsCommonsThis Newsletter is brought to you for free and open access by the Economics at Open PRAIRIE: Open Public Research Access Institutional Repositoryand Information Exchange. It has been accepted for inclusion in Economics Commentator by an authorized administrator of Open PRAIRIE: OpenPublic Research Access Institutional Repository and Information Exchange. For more information, please contact michael.biondo@sdstate.edu.Recommended CitationSondey, John and Murra, Gene, "The Price of the Yen: Does it Matter?; Slaughter Cattle Outlook" (1994). Economics Commentator.Paper 303.http://openprairie.sdstate.edu/econ_comm/303ECONOMICSCOMMENTATORTHE PRICE OF THE YEN:DOES IT MATTER?byJohn SondeyEconomics Asst. ProfessorIntroductionCan a higher price of yen actuallyaffect the quality of life in SouthDakota? Will a cheaper dollar somehowimpact the welfare of a South Dakotarancher or farmer? While the magnitude ofeffect may be different for differentpeople, the answer to both questions is"Yes." Currently, a more expensive yenhas stimulated car sales of US autoproducers, which in turn creates ripplesof spending throughout the US, some ofwhich wash up on South Dakota shores.-This essay will look at the basics ofcurrency markets.A foreign exchange market exists wheretwo currencies are priced in terms of eachother. In the US / Japan currency market,when the yen is equivalent to, say, 1 centUS, the dollar is worth 100 yen. Theprice of the yen in dollars is the mirrorimage (or reciprocal) of the dollar pricedin yen.Most economies maintain a managed,floating exchange rate between theircurrency and those of trading partners.The price of a currency is generally freeto bob up and down with the forces ofsupply and demand. However, if a nation'scurrency becomes severely over or undervalued, its central bank is likely tointervene in foreign exchange markets,selling or buying the currency to stabilize its price. Nonetheless, a centralbank is limited in the degree to which itcan influence the value of a currency.Weaker Dollar, Stronger YenIn the short run, the price of acurrency (in terms of other monies) is(Continued on page 2)SOUTH DAKOTA STATE UNIVERSITYNo. 334 April 25, 1994SLAUGHTER CATTLE OUTLOOKbyGene MurraExtension LivestockMarketing SpecialistThe 5-market slaughter steer priceaveraged almost $83.00 in March, 1993.Summer and Fall prices generally werebelow $75, averaging about $10 below theMarch high. This year the March price forthe same 5 markets was only $75. Aprilprices consistently have been $5-7 belowlast year. A price decline into theSummer similar to last year would putprices well below $70. Is that possible?A quick look at history and then atfactors expected to affect the price forfed cattle should help answer thatquestion.HistorySince 1988, fed cattle prices in mid-April always have been higher than thosein mid-June. In 1988, the difference wasonly 25C while in 1991, the difference was$7.00. For the remaining 4 years since1988, June's price was between $1 and $4below the April price. While none of thedeclines were as much as the $8 declinebetween March and June, the $12 declinebetween March and July, or the $15 declinebetween March and October of last year,there is strong historical evidence thatfed steer prices in the Spring are higherthan they are in the Summer.If one were to use the last 5-yearprice trend as a guide, a decline inprices of $5 from Spring to Summer wouldnot be surprising. That would mean pricesin the $70 area. A more likely scenariowould put prices this Summer and Fall inthe low $70's, maybe averaging in the $72-73 area. Only slight recovery into theFall is expected. Historical averageswould mean a $3-4 price increase, or aFall price in the $74-76 area.(Continued on page 3)Page 2determined by market forces. An Americanimporter of electronic goods from Japan isaffected by two relevant prices: (1) theprice of the electronic goods in yen and(2) the price of the yen in dollars.Conversely, a Japanese importer of USsoybeans will want to know (1) the priceof soybeans in dollars and (2) the priceof the dollar in yen.If the dollar weakens against the yen,the yen has become more expensive in termsof the dollar. Or, in terms of yen, thedollar has become less expensive. Here,the price of the yen might rise to $.0105- while the price of the dollar would fallto 1 /.0105 or 95 yen. A weaker dollarhurts the US importer, as a set quantityof yen is now more expensive - effectivelyhiking the cost of Japanese electronicgoods. On the other hand, the weakerdollar makes US soybeans cheaper toJapanese importers, stimulating US exportsof soybeans.How one views changing currency pricesdepends on the direction of change andwhether one is buying or selling abroad.In the same economy, one firm's nightmaremay be another's bonanza.Japan's Trade SurplusFor as many years as the US has run apersistent trade deficit, Japan hasenjoyed a trade surplus. Japan's ongoingsurplus can be attributed to a number ofdifferent factors: industrial, cultural,governmental, and the value of the yen.Japan is a high-tech economy,replacing its plant and equipment morefrequently than other nations, ensuringthat more efficient technologies areembodied in new machines. A moreefficient capital stock allows output perJapanese worker to be relatively high (butnot as high as for US manufacturingworkers). Thus, Japan' is able to producea surplus of high quality products.The fact that Japanese workers tend tosave at a much higher rate than the USlabor force (by a factor of 2-3 times)reduces Japanese per capita consumptionand mandates that Japan export a largerpercentage of her ever-growing output.Consumption in Japan is furtherdiscouraged by favorable tax rates onsav:'-'gs income, compared to much highertax rates on other earnings (up to 60% onincremental income). Finally, householddebt (and hence spending) is discouragedin Japan by the non-deductibility of suchitems as interest on mortgages.Policies that retard Japaneseconsumption reduce the demand for importswhile encouraging exports. The organization of Japanese.industry into keiretsualso reduces imports by favoring domesticover foreign suppliers. A keiretsuconsists of a number of producers of finalgoods in diverse industries, plus supplierfirms, a trading company, and a largebank. Trading companies are very reluctantto import cheaper inputs when the productcan be supplied from within the familylike keiretsu.The Japanese government, through itspolicies, also encourages the tradesurplus. Agencies such as MITI (Ministryof International Trade and Industry) andJapan's Export-Import Bank encourageexporters through loans, favorableinterest rates, and tax incentives.Alternately, restrictive Japanese policytoward imports also adds to the tradesurplus. While formal barriers such astariffs and quotas are not particularlyprominent, non-tariff barriers such asimport inspection procedures, qualitycontrol restrictions, and licensingrequirements effectively limit imports.Japan's Trade Surplus Strengthens the YenThe strong recent performance of theyen against the dollar can be attributedin part to the trade surplus discussedabove. Ironically, that same strong yenshould, in the longer run, yield a smallertrade surplus as Japanese goods grow moreexpensive abroad and exports fall. Underideal conditions of free currency andtrade markets, a strong currency willweaken, then strengthen, fluctuating abouta short run equilibrium. Over the longerrun, however, exchange rates will reflectrelative changes in economic fundamentalsamong economies.Japan's trade surplus strengthens thedomestic currency because, on the net,demand for the yen will increase, raisingthe price of the yen in foreign currencies. Consequently, more foreign currencywill be supplied in exchange, lowering theyen price of those currencies.fPage 3For many years (but not recently) theY relatively weak yen made Japan's productsattractive abroad. For example, in 1985,the dollar was very strong and the yenweak. The exchange rate was 250 yen to adollar and Japanese goods were very cheapto US buyers. Accordingly, the US tradedeficit began to swell, and central bankaction was taken to weaken the powerfuldollar in hope of lowering the US tradedeficit.Stronger Yen, Lower Japanese ExportsIn recent years, however, the yen hastended to appreciate against worldcurrencies. Economic theory tells us thatas a currency strengthens against those ofits trading partners, it will begin to. export less and import more. In fact,Japan's exports to the US did decline in1993 during which the dollar/yen rateranged between 100-110 yen. For example,Japan's share of the US auto market shrankfrom 35.6% in August 1993 to 28.7% inJanuary 1994. However, Japan's importsalso declined and her trade surplus grewto $130 billion. Japan remains in hermost severe recession since the OPECcrises of the 1970's. Typically inrecessions, spending declines whilespending on luxuries (imports) falls evenmore. Conversely, as the US economy hasexpanded, our demand for imports hasincreased, worsening our trade deficit,particularly the $60 oillion deficit withJapan.Stronger Yen, Weaker Yen:Conflicting Views in JapanA strong domestic currency is notnecessarily bad for an economy. Itsstrength implies an underlying confidencein the economy. Also, a strong currencyallows offshore acquisitions to be had atbargain rates and encourages.corporateexpansion abroad. Imported inputs (Japanhas almost no natural resources) are alsocheaper.Japan's economic planners have been oftwo minds with regard to the yen. Astrong or even stronger yen will allowJapan to improve her position as thedominant economy in the Far East -allowing her to build an industrial baseon the Asian continent, employing cheaplabor and avoiding restrictions onexports. Secondly, a strong yen canactually encourage development and exportof high tech, high quality products. Theargument goes that competitivedisadvantages associated with a strong yenwill force Japanese manufacturers to focuson - and dominate - the market for highestvalue, technologically intensive goods -one largely overlooked by other countries.The argument for a weaker yen, oneadvocated by many Japanese exporters, isthat Japan's economic planners shouldstimulate weak domestic consumption(possibly through tax cuts) while openingJapan more to imports. Increased domesticconsumption will speed Japan's exit fromrecession and reduce reliance on exportincome. This will increase the demand forimports, thereby reducing America's $60billion trade deficit with Japan. Asmaller trade surplus will eventuallyweaken the yen and make Japan's exportsmore affordable abroad.PrognosisForces favoring economic stimulationand a weaker yen will carry the field.Although Premier Hosokawa recentlyresigned, it is probable that hissuccessor (conceivably Hata, Hosokawa'sForeign Minister) will push equally hardfor deregulation, a lowered governmentpresence in economic planning, andconsumer welfare.While the average Japanese citizenenjoys a share of the national income pieroughly equal to ours (approximately$24,000), it allows only 2/3 of ourpurchasing power. For years, the Japaneseconsumer has paid for export subsidizationand import restrictions in higher pricesand lower consumption levels. TheJapanese economy will slowly evolve froman export-led to a more consiomer-ledconfiguration. In turn, Japan's importswill rise, while its trade surplus and theUS trade deficit (at least with Japan)will fall.(Murra -- Continued from p.l)Current FactorsThere are several factors which couldhave a major impact on cattle pricesduring the rest of 1994. Those factorsinclude the number of cattle on feed, thegeneral demand situation, and the grainmarket.SOUTH DAKOTA STATE UNIVERSITYEconomics DepartmentBox 504ABrookings, SD 57007Address Correction RequestedPage 4Cattle on Feed: The Cattle on Feed reportreleased on April 25 (for conditions onApril 1) was viewed as neutral by thetrade. Trade expectations were for a 1-2%increase in the number of cattle on feed,a 4% increase in placements during March,and a 3h% increase in marketings duringMarch. Since the actual inventory was 2%above the April 1, 1993 level, this partof the report was viewed as neutral. Theplacements figure (unchanged) was viewedas bullish, while the marketing figure(up only 1%) was bearish.In total, the report supported thecontention that supplies will be fullyadequate and that prices should remainbelow $75. That supports the ideas notedearlier that prices probably already havepeaked and that Summer will be lower thanSpring prices and maybe even a littlebelow last year.Demand: Although pork supplies may bebelow 1993 levels, poultry supplies shouldmore than make up for the difference.That means consumers will have amplesupplies of all meat proteins from whichto chose. In addition, while beef exportsare not expected to drop from 1993 levels,there doesn't appear to be a greatexpectation for a large increase. Intotal, a demand picture similar to 1993 iswhat can be expected. And, that isn'tstrong enough to give prices a big, ifany, boost.Grain: If 1994 is even close to a normalyear in grain production, it will provideencouragement to feeding, not only cattlebut also hogs and poultry. Also, a "morenormal" grain situation should supportfeeder cattle prices.OutlookBoth from an historical view-point andfrom an analysis of more current factorsexpected to impact cattle prices, theoutlook cannot be described as optimistic.Prices should decline from the currentmid-$70's to the lower $70's. That isexpected to be the price for the Summer.Fall prices should be a little higher,maybe even pushing back close to the mid-$70's.ECONOMICSCOMMENTATOREDITOR: Donald C. Taylor, Agricultural EconomistECONOMICS DEPARTMENTSouth Dakota State UniversityBox 504ABrookings, SD 57007Phone: (605) 688 - 4141475 copies of this newsletter were produced at a costof less than $100

The Price of the Yen: Does it Matter?; Slaughter Cattle Outlook

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