There is a growing suspicion that the United States is in the midst of a serious financial crisis and that it has become increasingly hard to control inflation and deflation. We are already seeing the result in US interest rates, and an increased devaluation of the US dollar makes sense as deflation makes our currency more attractive for other countries.
Consider a scenario where Japanese yen is currently worth more than the US dollar. That would be a big problem for the United States. The Japanese economy is huge, they are a huge customer for the United States and their banks are always doing business with Americans.
Also, Japanese banks do not have an extra dollar in their vaults because the dollar is already being used as a reserve currency. So, Japan’s foreign exchange reserves are becoming more important.
This situation would make it difficult for the Japanese government to use its wealth in the Japanese market to purchase the US dollar. As the Japanese dollar strengthens, Japan will not have a way to spend this additional wealth domestically.
The Japanese government and banks are still taking the actions necessary to maintain the value of the Japanese currency. They are not trying to export their excess funds, they are just using it for interest payments. This helps prevent the US dollar from becoming weaker than it already is.
It makes sense for the Japanese government to have less influence over the value of the yen than it does over the value of the dollar. They will try to maintain the stability of the yen by acting in good faith. If they do not, the international media will play up the deflationary aspects of the situation and this could cause a bigger backlash against the Japanese government.
Of course, Japanese banks have been aggressively financing US businesses, not just American businesses, but global businesses. That means that there is always going to be a flow of money into the United States and this creates a strong foundation for it to increase its purchasing power.
When they get stronger demand for their goods and services, they can grow their domestic economy even faster. It’s like a giant snowball. You put some snow on the ground and it starts rolling downhill.
What happens when the US dollar goes down further? It might take a while for consumers to feel the effects of deflation, but it will be there sooner or later.
If the dollar weakens enough to make it attractive for American companies to go out of business, it may take a long time for inflation to be reduced. But, once it is, Americans are likely to save their money in the form of assets like real estate.
A weakened Japanese dollar will help consumers in this manner because of the massive amount of trade with the United States. Even if the Japanese government does nothing, eventually it will strengthen enough to make it easier for people to save their money and earn more.
That Japanese yen will probably appreciate very fast in the coming years because people will think it’s worth investing in. Now it’s time for the Japanese government to start doing something about their currency, it’s time for the banks to get serious about their customers.