Yen and Yuan
The Impact of Exchange Rate Fluctuations on the Asian Economies
C. H. Kwan
RIETI
November 2001
The Yen-dollar Rate as the Major Determinant of Asian
Economic Growth
(Y ear-on-year, %)
-40
-30
-20
Stronger
Yen
Asian Crisis
Yen / US$
-10
0
10
20
(Y ear-on-year, %)
12
10
Asian Economic Growth
8
6
4
2
0
-2
(Y ear-on-year, %)
8
US Economic Growth
6
4
2
0
-2
-4
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00(e)
Note: Asia = NIEs + ASEAN + China
Source: Compiled by RIETI based on official statistics.
External Factors Affecting Asia's Economic Growth
Effect on Asia's Growth
1% Increase in Japan's Growth
0.1%
1% Yen Appreciation
0.1%
1% Increase in US Growth
0.3%
1
The Impact of a Stronger Yen on Asian Economic Growth
Positive Effects
Negative Effects
Increase in direct
investment from Japan
Higher prices of
imports from Japan
Improvement in export
competitiveness against
Japanese products
Higher burden of
Yen-denominated
debt
Countries with trade structures competitive with Japan (e.g.,
South Korea) should benefit more than ones with trade
structures complementary to that of Japan (e.g., China) .
Korean Export Performance Hinges on the Yen-Dollar Rate
(Year-on-year, %)
-30
-20
Stronger Yen
Yen / Dollar Rate
-10
0
10
20
(Year-on-year, %)
40
Light Industrial Exports
Heavy Industrial Exports
30
20
10
0
-10
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Source: Compiled by RIETI based on Korean trade statistics.
2
The Impact of a Stronger Yen on Asia
a) Gain in Export Competitiveness
Price
S
D’
D
Output
b) Higher Import Prices
Price
S’
S
D
Output
Source: RIETI
3
Specialization Indexes for Major Categories of Manufactured
Goods (1999)
Manufactured
Goods Chiefly
Classified by
Material
-0.02
0.30
0.31
-0.10
-0.28
0.52
-0.08
-0.09
-0.54
0.19
Chemicals and
Related
Products
China
Korea
Taiwan
Hong Kong
Singapore
Indonesia
Thailand
Malaysia
Philippines
Japan
-0.40
-0.03
-0.28
-0.11
0.15
-0.31
-0.36
-0.29
-0.80
0.15
Machinery and
Transportation
Equipment
Miscellaneous
Manufactured
Articles
-0.08
0.28
0.11
-0.07
0.06
-0.04
0.05
0.13
-0.06
0.54
0.76
0.23
0.22
0.17
-0.09
0.84
0.69
0.34
0.33
-0.13
Source: Compiled by RIETI based on ADB，
Key Indicators of Developing Asian and Pacific Countries, 2000.
Comparison of the Trade Structures of Japan and Asian
Countries (1999)
(Correlation Coefficient)
Competitive
0.6
Singapore
Korea
0.4
0.2
Complementary
0.0
Philippines Taiwan
Malaysia
-0.2
Thailand
-0.4
Indonesia
Hong Kong
China
-0.6
-0.8
100
1000
10000
100000
(Per capita GDP in 1999, US$)
Notes
1) The degree of competition between an Asian country and Japan is calculated as the
correlation coefficient between their respective vectors showing the specialization indexes
([exports - imports]/[exports + imports]) of major categories of manufactured goods. To focus on
competition in the manufacturing sector, a four-category classification comprising chemicals
and related products (SITC Section 5), manufactured goods classified chiefly by material (SITC
Section 6), machinery and transport equipment (SITC Section 7), and miscellaneous
manufactured articles (SITC Section 8) is used.
2) The specialization indexes for Hong Kong, and thus its degree of competition with Japan,
have been distorted by the presence of re-export trade.
Sources: Compiled by RIETI based on ADB, Key Indicators of Developing Asia and Pacific
Countries , supplemented by trade statistics of individual countries.
4
Synchronization between the Yen-dollar
Rate and Korea's Terms of Trade
(Year-on-year, %)
Asian Crisis
-30
-20
Stronger Yen
Yen-Dollar Rate
-10
0
10
20
(Year-on-year, %)
40
Japan's Terms of Trade
20
0
-20
-40
(Year-on-year, %)
10
Korea's Terms of Trade
5
0
-5
-10
-15
-20
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Note: Terms of trade
=
Export prices
Import prices
.
=.
Output prices
Input prices
Sources: Compiled by RIETI based on official statistics.
Pegging Closer to the Yen
 Stabilizing yen-dollar rate.
 Pegging to a currency basket in which the yen carries substantial weight.
 Assuming that the Korean won is pegged to a basket of currencies in
which the yen carries a weight of 70%, The Korean won is allowed to
appreciate (depreciate) by 0.7% when the yen appreciates (depreciate) by
1%, both against the U.S. dollar.
 “Optimal weight” of the yen reflects extent of competition with Japan.
5
Correlation between Asian and U.S. Economic Growth Rates
1971-84
0.731
0.139
0.584
0.857
0.705
0.461
0.436
0.545
0.537
-0.189
0.616
Asia
China
Korea
Taiwan
Hong Kong
Singapore
Indonesia
Thailand
Malaysia
Philippines
Japan
1985-98
-0.193
0.161
-0.298
-0.013
-0.102
-0.156
-0.321
-0.334
-0.343
0.204
-0.163
(1985-96)
0.175
0.262
-0.087
0.090
0.097
-0.074
-0.282
-0.068
-0.281
0.243
0.066
Note: Asia = NIEs + ASEAN + China
Sources: Compiled by RIETI based on official statistics of
countries concerned.
Counter-cyclical Movement of Real Interest Rates in Hong Kong
(1) CPI inflation turning negative
(Year-on-year, %)
25
20
CPI
15
10
5
0
-5
-10
(%)
(2) Real interest rate reaching a double-digit level
25
20
Prime Rate (U.S.)
15
10
5
Best Lending Rate (HK)
0
-5
Real Interest Rate
(Best Lending Rate -CPI)
-10
80
81
82
83
84
85
86
87
88
89
90
91
92
Sources: Compiled by RIETI based on official statistics.
6
93
94
95
96
97
98
99
00
The Yen/Dollar Rate and Japanese Exports to Asia
(Yen/$)
50
Yen / Dollar Rate
100
150
Stronger Yen
200
（ Share of Total Japanese Exports, % ）
250
45
40
China
35
ASEAN
30
25
20
15
10
NIEs
5
0
82 83 84 85
86
87 88 89 90 91
92
93
94 95 96 97 98
99 00 01
(1st half)
Source: IMF, International Financial Statistics and Japanese trade statistics.
The Yen-Dollar Rate as a Major Determinant
of the BIS Ratio of Japanese Banks
BIS Capital Adequacy Ratio
Capital
> 8%
Risk Assets
For Japanese Banks :
Capital (¥)
Risk Assets = Domestic Lending (¥) + Overseas Lending ($)
7
Comparison between Major Development Indicators of China
and Japan
Life Expectancy (years)
China
Japan
（Latest）
（Around 1960）
Female
72
Male
68
Female
72.92
（1965）
(1998）
Infant Mortality Rate（per thousand）
Male
67.74
31
30.7
（1999）
（1960）
Primary Sector as a Share of GDP(%)
15.9
16.7
（2000）
（1959）
Engel's Coefficient (%)
39.2
38.8
（2000）
（1960）
1,071
1,236
（2000）
（1960）
Per Capita Electricity Consumption (kwh)
Sources: China Statistics Abstract 2001, Japan's 100 Years (Kokuseisha).
Competition between China and Japan
Amount
Japan
China
(B)
(A)
C
Shoes
TV
Semiconductor
8
Product Sophistication Index ($)
Competition between China and Japan in the U.S. Market
($ billion)
1990
40
35
30
25
20
15
10
Japan
China
5
0
100
1,000
10,000
100,000
Product Sophistication Index ($)
($ billion)
1995
40
35
30
25
20
15
Japan
10
China
5
0100
1,000
10,000
100,000
Product Sophistication Index ($)
($ billion)
2000
40
35
30
25
20
15
Japan
10
China
5
0100
1,000
10,000
100,000
Product Sophistication Index ($)
9
Competition between Chinese and Japanese Products in the
U.S. Market
1990
1995
2000
(A）
China's Manufactured Exports to U.S. ($, billion)
12.0
38.2
86.5
(B）
Japan's Manufactured Exports to U.S. ($, billion)
84.0
114.1
134.3
(C）
Overlapped Amount ($, billion)
3.8
11.9
27.9
(C/B） China as a Competitor of Japan
4.6%
10.5%
20.7%
(C/A) Japan as a Competitor of China
32.1%
31.3%
32.2%
The Flying Geese Pattern of Asian Countries Exports
(In Terms of Exports to the United States)
(Share)
Singapore
40%
35%
Taiwan
Malaysia
30%
Philippines
25%
Korea
Japan
Indonesia Thailand
20%
China
Hong Kong
15%
10%
5%
0%
100
1,000
10,000
100,000
Product Sophistication Index ($)
Per Capita GDP and Country Sophistication Index (2000)
Country Sophistication Index ($)
11
Japan
10
1,0000
Korea
Indonesia
9
Philippines
Malaysia
Taiw an
Thailand
8
Singapore
Hong Kong
China
1,000 7
6
5
5
6
1,000
7
8
10
910,000
10 Capita GDP11
Per
The China Factor in Japan's Deflation
Lower import prices
Price level
S
S'
D
Output
Demand shift to Chinese products
Price level
S
D
D'
Output
The Impact of Yuan Appreciation on Japan
Price level
S'
S
D
D'
Output
11
Real Effective Rate of the Yuan
人民元の実質実効為替
（90=100）
160
150
Versus Asian Currencies
対アジア
140
Stronger Yuan
↑
人
民
元
の
割
高
130
120
110
100
90
80
Versus Currencies of
70
Major
対全体 Trading Partners
60
90
91
92
93
94
95
96
97
98
99
00
Note: Export-weighted and based on WPI
Source: Nomura Research Institute
The Impossible Trinity
Full Capital Controls
China
Monetary
Independence
Exchange Rate Stability
Malaysia
Thailand
Hong Kong
Japan
Free Floating
Full Capital Mobility
12
Monetary Union
China’s GDP since Opening Up
1978＝1
30
Nominal
(In terms of Yuan)
25
20
15
10
Real GDP
5
Nominal
(In terms of US$)
0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
（e）
Source: IMF, World Economic Outlook
Relative Nominal GDP among China, the U.S. and Japan
0.8
0.7
0.6
Japan / U.S.
0.5
0.4
China / Japan
0.3
0.2
0.1
China / U.S.
0.0
1970
1973
1976
1979
1982
1985
Source: IMF, World Economic Outlook
13
1988
1991
1994
1997
2000