Look for continued Yen weakness as Japanese manufacturers keep lowering the prices for their goods in USD terms:
Today's Cyber Week deal: Makita 12-Volt Max Lithium-ion Cordless Combo, only $89 (was $129)! https://t.co/aJHTwCHkxY
— The Home Depot (@HomeDepot) December 2, 2014
The dollar rally is putting everything on-sale for US consumers.
ReplyDeleteBargains with the devil though, because congress isn't running large enough deficits to compensate for net-imports, and of course incomes aren't growing much faster than inflation (policy goal of the fed/congress), so the imports will result in more sector private debt or fewer domestic jobs.
Ryan,
ReplyDeleteConsider: "Everything on sale is causing the dollar rally...."
So we dont want to say: "Congress is not running large enough deficits..."
Congress does not have any control over that... its like a "leakage"...
Its like a motor circuit where you have thermal loss in the motor (resistive component) and you put your hand over the motor to see if it is getting warmer because you see a correlation between the motor getting warmer and the pump moving more gal/hr.... its not "the motor getting warmer" that makes the pump run faster...
Looking at the deficit is like putting your hand on top of the motor to see if it is getting warmer... MAYBE correlation not causation...
If the Japanese want to compete for USD savings by lowering their prices in USD terms and gaining sales/share then the exchange rate eventually reflects that...
How can Makita take USD receivables to the bank at $129 for drills they are now selling for $89?
The bank wont give them $129 against drills they are now selling for $89... so the exchange rate adjusts to reflect the new real terms of trade...
Apple's iPhone 6 is more expensive than the 5, etc...
rsp,
You have to make this mechanism more clear. It is not obvious to anyone (even me) how lowering the price in dollar terms (ostensibly increasing dollar volume sales and market share as you state) results in a weaker yen. You really have to clarify this.
ReplyDeleteMike what if last quarter they moved 50,000 drills into the US at $129...
ReplyDeleteNow this quarter they want to move 60,000 so they lower the price to $89 to blow out the sales....
So they are probably still sitting there with what is left of the previous quarter's 50,000 financed at $129...
So now they come into the bank and say they want only $89 per unit, while they still have 1,000's sitting at $129 at the bank....
So what does the bank do when they see this coming at them?
iow the bank is sitting there lending against drills at $129 while the same manufacturer comes in later and now only wants $89 against the same or better drill .... ????????? If you are at the bank you are like "WTF???"....
I think you have to look at it as the bank here.... iow the collateral of your credit line to the drill people just took a major hit... your drill customer just came in and told you that they are not valuing their product as highly in USD terms as they did a short time ago.... uh oh!
so if this becomes a general trend across the multi-national industries between County A and Country B (say Country A has domestic fiscal drag while Country B does not....) , the bank takes defensive measures and revalues the "exchange rate" to protect its balance sheet assets (loans to drill people, car people, etc..)... in this case a Japanese bank financing US receivables would make a USD worth more vs the Yen so the banks receivables would still be worth as much Yen even though they took a hit in USD terms....
The Japanese bank reports in Yen as does Makita... so the bank is protected as they are the govt fiscal agent/monopolist/"price setters" of the exchange rates they move them where they need them to go in their self-interest ...
and the Makita people look like geniuses as their earnings blow thru the roof in Yen terms.... everybody there at Toyota gets a big short term Yen bonus in financial terms while lowering their real terms of trade to the US going forward....
Or something like this (I have more work to do on this) .... whatever the process, it has to run off self-interest or defensive interest ... iterative transactions where the two parties (bank vs. firm) take turns at self interest/defensive interest....
Not saying "this is a good way to run a railroad...."
rsp
Mike its like in a domestic situation where a bank did a bunch of loans on houses at $150/psf and then material prices collapse to $100/psf.... now what?
ReplyDeleteYour collateral on all of your outstanding loans you did at $150 just fell by 33%....
In domestic economy you better have a good relationship with Wash, DC and go get a bailout...
in cross border cases, we have FFNC system where they can just adjust the "FF" part to where they need it instead of a "bailout".... domestic workers take hit in real terms of trade but the banks assets are re-priced to their benefit and they are not afoul of regulators...
rsp,
I think you have to state it like this:
ReplyDeleteSuppose the USD/JPY exchange rate is 1.00.
At that price, Makita can sell 1 drill for $1 dollar.
1 unit gets sold at the USD exchange rate of 1.00.
Now for whatever reason (weaker demand, let's say), Makita must lower its price to $.80 in order to sell 1 drill.
It now takes 0.80 dollars to buy 1 drill. That's the same thing as saying the USD/JPY exchange rate has gone to 1.25. (Yen has weakened.)
Math 1/0.8 = 1.25
and...
1/1.25 = 0.80
This is an extremely interesting dialogue men.
ReplyDelete