Wednesday, December 19, 2012

Dollar Yen

One of the more interesting things about living in Japan so far has been the foreign exchange component. Because I am being paid in dollars and paying rent and eating in yen fluctuations in the USD/JPY can really effect our costs of living. I've thought about ways to hedge against this risk, but it seemed pretty complicated. So to make a long story short, I'm long dollars and short yen.

Back in September when we were first thinking about our upcoming move, the 1 dollar was worth about 78yen. As a frame of reference, a 16.9oz Coke is about 150 yen. With some products (like iPads) the company will just change the dollar sign to the sign for yen. This means that some things are about 20% more expensive. It's been around that level for a couple years, though when I first came to Japan in 2007 the exchange rate was 1 dollar to 120 yen. This is in large party due to recent U.S. monetary policy which sought to lessen the recession by increasing the money supply and keeping interest rates near zero.

Luckily, things have just started to change. There were just elections in Japan on Dec. 16th. Before the elections the ruling party was the Democratic Party of Japan. They had won in a landslide election after the Global Financial Crisis (called the "Lehman Shock" in Japan). In the run up to the election polls were showing that the Liberal Democratic Party (the "LDP") was likely to win the election.

Abe Shinzo, the party leader, made some comments about how he thought the Bank of Japan (the "BOJ") should set target inflation rate higher. The BOJ currently had set a target inflation rate of 1%. Unfortunately, rates were slightly deflationary meaning that the BOJ did not meet it's target. A new governor of the bank of Japan will be selected in March. At this point the USD/JPY had increased to 82.

Later, polls predicted that the LDP would win a super majority (2/3 or >320 seats) of the lower house. With the super majority they would be able to over ride the upper house's veto and have the freedom to pass laws without compromising with other parties. At this point the yen increased to above 83.

Finally, the LDP (along with it's partner the New Komeito) actually won a super majority of the lowerhouse. Abe is scheduled to take over as Prime Minister on the 26th. The yen is now at about 84.5!

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