how a lower currency value isn’t a sign of poor economy like in Japan?
In: Economics
Japan don’t divide yen into hundreths like cents or pennies. They used to use Sen and Rin which were fractions of 100 and 1,000 respectively but they stopped using them in 1954. Think of 100¥ as like 100 cents. The current exchange rate is 100¥ to $0.66, or another way of thinking it is ¥100 to 66c which isn’t that far apart.
Stability is a factor that matters a ton more than what the base arbitrary “unit” is. For example, 1 cent being so useless doesn’t mean the US economy is doing badly, and if you started expressing everything in cents rather than dollars ($100 = 10,000 US cents), you’d actually be on a comparable level to yen (100 US cents ~= 150 yen) and still you change nothing.
Export based economy. If you actually produce it’s not a big deal.
If you produce nothing then you’re poor. Like all of Africa except South Africa
If you multiply everything in your currency with 100. So prices and wages nothing changes at all. The number on the currency realy doesnt matter. The things that do matter is how do wages change in comparison to prices and how does the value of your currency change in comparision to other currencies.
In a sense the value of currency is irrelevant.
Let’s say Texas declares independence and because everything is bigger in Texas, they create a new currency, the MegaDollar (M$). Citizens can exchange in their USD at a rate of 1 USD => 1 000 000 M$, meaning a M$ is worth 1E-6 dollars.
Now, the shops also update their prices to the new currency. A beer that cost 2.5$ yesterday? Today it’s 2 500 000M$. Milk now went from 4$ a gallon to 4 000 000M$ a gallon. What you can immediately see is that the cost of products is actually exactly the same as before. You want that gallon of milk? Just walk to the bank with your 4$ and you get the 4 000 000 M$. So despite the M$ being FAR less valuable than the USD, after taking into account the exchange rate, the price and services cost exactly the same and the economy will be exactly the same size as before the currency swap.
Now, obviously this is only true when the exchange rate is fixed and/or the prices follow the exchange rate.
Let’s say that 5 years after the Texas independence, everyone in the US noticed that they don’t really give a shit and replaced the products they used to buy from Texas with local ones, which are now cheaper than Texan ones, because Texans now need to pay tariffs for their exports to the remaining states of the USA. So now no one is buying M$ to buy Texan products, and the currency exchange rate plummets from the initial 1$ => 1 000 000 M$ to a new rate of 1$ => 2 000 000 M$. After this drop, the megadollar is extremely cheap, and suddenly that 4 000 000 megadollar milk gallon only costs 2$, so it’s cheaper than local stuff even after the tariffs!
On the receiving end though, the guy selling the milk gallon (probably) can’t just double the price to match the new exchange rate, because he’d just lose his customers who want the cheap milk only because the M$ dropped in value. So he’s still getting the same 4 000 000 M$. So, assuming the overall demand for megadollar priced milk remains the same, the Texan milk economy is making just as many megadollars per year as they did before the currency rate drop. However, now when you convert to USD, their *effective* economy has dropped by a factor of two – because the M$ is less valuable than before.
Now, what can we learn from this? You can use currency exchange rates to study how well an economy is doing, but what matters is not the value of the exchange rate, but rather how it changes relative to the prices of products bought and sold in that currency. If the exchange rate increases by a factor of 10 but all prices also increase by a factor of 10, the net change in economy is actually zero.
Now of course this is vastly simplified, the economy is a complex and hard to predict system, and does not always behave fully rationally or logically. But the main gist is, the number on your money doesn’t matter, only how much stuff that arbitrary number is worth.
the value of a currency is set by many factors.
Its called a backing, money is just a number or a piece of paper whos value is set by how much faith people have in the issuer of that currency.
originally there was the gold standard, meaning that the value of a currency was set by the amount of money in circulation devided by the value of the gold reserves of that country, this was ended in the 1970´s with nixon becuase people were abusing the gold standard to get cheap gold and the strenght of the currency was causing problems at a time where the US economy couldnt handle it.
anyways… the gold standart also ignores added value, if i take a tree and i want turn it in to a chair, if im just using the value of the wood then the tree and the chair have the same cost, but added value means the value to add to a commodity like the wood by transforming it.
The tree is worth less then the wood planks, the difference is the cost of chopping down the tree and turn it in to a format you can use to build things. the wood plans are worth less then a chair, the difference is the work taken to cut down the plans to the pieces and putting it togather, by using a standard tied to a commodity like gold or oil, you ignore the work taken to transform that commodity from one form to another.
so back to the basics, money is not actually money… its a note that says that the issuing entity (goverment, central bank, local bank) owes you X dollars/euros/yen worth of resources. and is accepted as legal tender, meaning its an acceptable form of exchange of goods and services in a market.
and the issuing entity can varie the value, the value is set by the seen value of the economic value of issuing entity, tax revenue and production of a country, resources they own, commodities they own or can exploite, forigne debt or currency held… basically it all comes to a number, and in a very simplifed description of the process this figure is divided by the value of circulation/printed currency to set a value.
Now an issuing entity can manipulate this value by issuing more currency or buying back currency from the market and removing it from circulation.
so if japan wanted tommorow they could say 100 yen are now 1 New yen, if they have a trillion yen in circulaiton, only issue only issue 10 billion in new yen, and then you just slashed 2 zeros off the currency, all that costs money and effort… and is 100% worthless.
Becuase the number of zeros on a bill might have a psycological effect, but in reality you have to take in to account the concept of economic proporcionality.
Since currencies are attached by an exchange rate, if 1 dollar buys you 100 yen or 1 new yen, it dosnt matter, its just an arbitary value , whats important is what you can buy with it.
If a can of coke was 100 yen, but now its 2 new yen, you basically devalued your currency by half and everything costs twice as much. so usually goverments produce a customer price index which is made to control the general value of the currency, basiclly it compares the the value of the currency compared to set products in the market, so basically yo track the price of several base products, eletricity, bread, gasoline in comparison to the value of your currency.
If bread goes from 50 cent to 1 buck for a loaf, it dosnt mean your currency lost half its value, could be that the price of labor has gone up, or the price of wheat has gone up or the price of gas has gone up and its more expensive to move the bread from the bakery to the market.
but if bread costs more, gas costs more, electricity cost more, you´re going to go your boss and ask for a raise, so your salaray will rise but your boss will have to charge his clients more to pay for your salary to keep the business going.
Meaning everything costs the same, but in proportion the numbers are bigger… this is inflation, the market compensating for the rise of costs.
so basically, we go back to the concept of economic proporcionality, it dosnt matter how many zeros on the bill, it matters what you can buy with it. if your economy is shit, you cant buy a lot, if your economy is good then you can buy many things with it.
so it dosnt matter if 100 yen is a dollar if a coke costs 100 yen, it does matter if a coke costs 500 yen.
The actual numbers on currency are not particularly important when comparing different currencies. Instead, you should look at the development of the currency over time. In other words: if you have a certain amount of the currency, can you buy more or less than previously? And can you exchange the currency for more or less of other currencies?
Let’s say you can buy an apple for a dollar in the US, or for 100 Yen in Japan. Now fast forward ten years. The same apple costs 1,5 dollars and 125 yen. Which currency is doing better? Well, the yen has decreased less in value, so probably the yen – and the Japanese economy – would be doing better in this example.
Or lets say that you can exchange one dollar for 100 yen. One year later, you can exchange one dollar for 87 yen. Which economy has been doing better? Probably the Japanese, because it takes more dollars to get the same amount of yen.
And so the value of each unit of currency is only interesting over time.
“Lower” is ultimately arbitrary. Lower than what? Only one currency can be the most valuable so does that mean that any other currency weaker than the most valuable one means that the people in its country of origin are eating dirt and living in cardboard boxes? Most people compare a currency’s value against the dollar as the benchmark but it really isn’t the whole story. The US dollar is the 10th most valuable currency in the world, which means there are a lot of other currencies above it considered more valuable. The euro is more valuable but the entire EU economy is smaller and with a worse growth rate than the US economy. Europeans are generally making less money than Americans. The swiss franc is valuable but not for the same reasons why other currencies are valuable.
It’s a nuanced subject. You have to understand that what is called a “poor” economy by the media and financial institutions often just means it’s not skyrocketing all the time meaning people can’t make easy money off of it by investing. Japan has been more or less stagnant for 30 years and considered to be pretty much constantly going in and out of recession. That sounds bad on paper and you can be sure there are tons of gloomy headlines about it every year but ultimately what does it matter if their economy is stagnant and 1 dollar is 100 yen? Japan has a very high standard of living, great infrastructure, amazing industry, and even in their semi permanent state of recession and stagnancy they still manage to be at the top of the world’s economies by sheer size alone. That says a lot.
Basically there’s a lot more that goes into it.
They use a cents currency instead of a dollar. Its not like Zimba or somewhere that experienced hyperinflation and had to print billion dollar bills. Their system, like others (Hungary for example), didn’t start with products costing a few yen then it became worthless. Stuff was always priced at hundreds or thousands of yen.
Why should it? Currency unit is arbitrary.
Deciding that a house costs 1000 schleems is just a convention, what matters is how many schleems you can save every month to buy it – it’s all relative.
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