–The G7’s backwards thinking about the Japanese yen. Save Japan from its friends.

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
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Once again, the mainstream economists have things backwards. I recently came across this article:

Is G7 yen intervention a good idea? by MICHAEL SCHUMAN, 3/18/2011
In a highly unusual step, the G7 agreed on Friday morning to coordinate their efforts to control the sharp rise in the Japanese yen. The decision today was prompted by a sudden surge of strength by the yen that by Thursday morning (in Tokyo) had pushed the Japanese currency to a record high against the U.S. dollar. Though the yen had subsequently pulled back a bit, it was still at a level worrying to Japanese policymakers. Japan freaks out when the yen strengthens, because it makes Japanese exports more expensive in international markets and thus can dampen economic growth.

Last week, I posted about why charitable contributions to Japan were meaningless. Now, the economists want to facilitate Japanese exports. Before you read any further, stop and think about this question: What is the purpose of Japanese exporting? The answer is not what you may have been told.

The purpose of Japanese exporting is to import yen. Japan doesn’t want to expend massive amounts of time, energy, labor an raw materials just so they can supply us with cars, computers and television sets. The Japanese are a nice people, but they’re not that generous. No, the sole purpose of expending time, energy, labor and raw materials is to acquire yen.

But, Japan is Monetarily Sovereign. It has the unlimited ability to create its sovereign currency, the yen. Even were Japan’s exports to fall to zero, the Japanese government could create sufficient yen to support its economic growth. Japan has no need to import yen (i.e. export goods and services).

The G7 (soon to be overtaken by the E7, but that’s another story) is using an obsolete gold-standard philosophy in a post-gold-standard world. Today, Monetarily Sovereign nations do not need to import their sovereign currencies. Stimulating Japan’s yen imports is like stimulating rain over the ocean.

And in any event, Japan soon will create and spend trillions of yen to rebuild its nation. That massive influx of yen will weaken the yen, and the G7 can breathe a sigh of relief. It also will engage in an orgy of back patting, for accomplishing something not only unnecessary, but something that would have happened naturally.

But what can you expect from a group that still has no concept of Monetary Sovereignty, perhaps partly because three of the “7” (France, Germany, Italy) were foolish enough to surrender their own Monetary Sovereignty.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity, nor grow without money growth.

MONETARY SOVEREIGNTY

14 thoughts on “–The G7’s backwards thinking about the Japanese yen. Save Japan from its friends.

  1. The purpose of Japanese exporting is to import yen?
    That seems backward thinking to me. The macro result of japanese exports might be importing dollars or euros, but not yen. And the japanese need to export to sell what they produce, which is more than what the domestic market can absorb in terms of cars, tvs, etc. It’s got nothing to do with how many free yens you get from the government.

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  2. MamMoTh,

    The sole purpose of exporting is to import money. You said, “And the Japanese need to export to sell what they produce, which is more than what the domestic market can absorb . . .”

    Why do they produce more than they can use? Production uses valuable resources and takes people’s valuable time. Why do the Japanese invest so much in producing stuff they have no use for? Isn’t that a waste?

    Answer: They produce more than they can use solely to acquire money. But, the Japanese government already has the unlimited ability to create yen. Acquiring dollars and euros is identical with acquiring yen, because dollars and euros are freely exchangeable for yen.

    No Monetarily Sovereign nation needs to export. That is one of the several counter-intuitive facts of Monetary Sovereignty. Understanding Monetary Sovereignty requires unlearning popular wisdom.

    Rodger Malcolm Mitchell

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  3. To import foreign money yes. Not to import yen, unless they’ve exported them first.

    They produce more than they can use because they are good at it. And there are only so many cars, TVs, video-games, etc. that the japanese want to possess. Remember they live in pretty small places. The question is why do they prefer to delay imports indefinitely.

    No nation needs to export unless it needs to import, but you are better off exporting what you are good doing at and importing what you are not so good at doing. This has nothing to do with being monetarily sovereign or not.

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  4. The point was, the Japanese (and all other Monetarily Sovereign nations) do not need to export. Exporting is just a method for importing money, but a Monetarily Sovereign nation can produce all the money it needs, internally. It does not need to import money.

    The Japanese don’t produce more cars than they need because “they are good at it.” That would be silly. Why does a farmer produce more corn than he can eat? Because he’s good at it??? No, to obtain money.

    No, the Japanese do not need to export so they can import. If they didn’t export anything, they still could import unlimited amounts. Merely create yen and exchange them for some other nation’s currency, which they can do endlessly.

    It has everything to do with being Monetarily Sovereign. A monetarily non-sovereign nation needs to export, because it does not have the unlimited ability to create money. That is why the PIIGS need a positive balance of payments and the U.S. does not.

    Rodger Malcolm Mitchell

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  5. Have to agree with MamMoth. True, nations don’t need to export per se. The concept makes no sense. The need/desire for imports is the only reason for exporting, ever.

    But nations may need to import – e.g. if they have a large population and their own agriculture can’t support it. That was the position of Germany during both World Wars, and a major reason for losing them. Monetary sovereignty did not and could not help.

    Japan could run up a big trade deficit, like the US, but could not import unlimited amounts. The yen would depreciate against foreign currencies.

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  6. Money is only worth what it can buy. If Japan didn’t export the ROW would not want their yen, so it wouldn’t even be traded, and Japan wouldn’t be able to import. Money is, after all, a medium of exchange, if there is no exchange there is no money.

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    1. What makes you think the Japanese don’t export Yen as well?

      They do. They provide liquidity to the rest of the world in exchange for supplies of foreign currency. That then provides the Yen liquidity for export contracts denominated in Yen.

      The demand for Yen is there because the demand for Japanese cars is there and that ensures the export contracts are in Yen.

      Banks then ask the Japanese for some Yen which they are only too happy to provide since they have an infinite supply of the stuff.

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    2. “The demand for Yen is there because the demand for Japanese cars is there and that ensures the export contracts are in Yen”

      Neil, that is exactly what I said isn’t it?
      Who would import yen if they couldn’t buy anything from Japan?

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  7. If I understand correctly, you’re saying the sole reason people want yen is to purchase Japan’s exports, so if Japan didn’t export at all, the yen would have no value. You may be right, though gold isn’t used in international trade, and it has value. Anyway, you make an interesting speculation about an unrealistic situation.

    However, I was giving an extreme example to address the article’s claim that the rise in yen value would “dampen” Japan’s growth by reducing exports, which simply is not true. Reducing Japan’s exports (i.e. reducing Japan’s money imports) would not dampen the growth of a Monetarily Sovereign nation.

    Rodger Malcolm Mitchell

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  8. MamMoTh,

    Your point is that in the unlikely event Japan ended all exports, no one would want yen. I had not considered the total elimination of exports as anything more than a hypothetical example, but it does make for an interesting speculation.

    Let’s say that Japan did end all exports, which it could do, simply because, as a Monetarily Sovereign nation, it doesn’t need to import money. Japan would continue to need imports of goods and services, however.

    If you were a foreign supplier of goods and services, you would have two choices: Either refuse to sell to Japan, thereby forfeiting a potentially huge customer. Or you could accept yen.

    My guess is, many suppliers would choose to accept yen. Now, what will they do with all those yen? They can’t use them to buy things from Japan, because Japan isn’t exporting. I speculate that the yen would be exchanged for other currencies, much the way that gold, a non-money, non-intrinsic-value commodity is traded.

    Some of the yen might wind up in the hands of international travelers, whether they be Japanese going home or foreigners visiting Japan. Most of the yen merely would circulate as an exchangeable commodity (again, like gold).

    Because a hundred million Japanese would continue to value the yen, I doubt it would become valueless. I can’t visualize how a commodity could have great value to 100 million people, but no exchange value to the rest of the world. Can you?

    Rodger Malcolm Mitchell

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    1. I can’t visualize how a commodity could have great value to 100 million people, but no exchange value to the rest of the world. Can you? If there is no way to get the commodity, yen, back to these 100 million people who value it, then it will have no exchange value (other than as a collectible).

      Japan would have to cut off all normal contact with the outside world to make the yen valueless internationally – as you note, tourism to Japan, or Japanese travelers selling things for yen (which is exporting) would create a demand for yen among non-Japanese.

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      1. Or Japanese tourists, first exchanging yen for foreign money so they could travel in a foreign country, then wanting yen back when they come home.

        It’s all hypothetical and extreme of course, and doesn’t affect the reality that a Monetarily Sovereign nation need not increase or even maintain its currency imports (a.k.a. exports of goods and services). It can run a negative balance of payments forever, while growing forever.

        Rodger Malcolm Mitchell

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  9. Rodger, I could visualize a commodity having great value to 100 million people and no value to the rest of the world if they had no means to get anything from those people, that is if the country does not export anything to the rest of the world (international tourism being an export industry where the foreign customers ship themselves to buy goods and services).

    I don’t say that it would be the case now with the yen if Japan stopped exporting this moment. Maybe the yen is already used for international payments between non japanese businesess, pretty much as the US dollar is used. That is why the US can keep running its trade deficit without trouble, but that’s not the case for most countries.

    But back to the original concern of the japanese getting concerned about the rising of the yen, I wonder if it wouldn’t be in their interest to let it appreciate and make imports cheaper for the reconstruction tasks they must undertake.

    They could even hire all those unemployed in Spain due to the collapse of the construction sector.

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  10. MamMoTh,

    Exactly. As a Monetarily Sovereign nation, that does not need to import yen (i.e. export goods and services), Japan would benefit from a stronger yen. Japan could create more yen, thus stimulating their economy, with less concern about inflation.

    Rodger Malcolm Mitchell

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