Japan's Currency Moves Give Me a June '30 Feel

Jim Jubak MSN Money September 21, 2010

Just as the Smoot-Hawley Tariff of 1930 helped put us on a course toward the Great Depression, Japan's recent currency move could begin a downward spiral.

It's starting to feel a little bit like June 1930. And that's worrisome.

How to invest in currencies

Watching the unilateral decision by the Japanese to intervene in the currency markets to force down the price of the yen and protect Japanese exports, I've started to worry about a replay of that history.

This time the starring role would go to beggar-your-neighbor currency interventions and not to a tariff. But the effect could be the same: Each of the world's governments, in trying to protect the interests of its own economy, would help kill off growth in the global economy.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=277a6b9c-acb8-4cbc-af99-90caf14345b5,0b1fd57a-3c12-4624-ab25-b126f4a34413,007ee6e4-31f1-4cff-9e54-db96b690564e,3575091f-2242-46ad-8eab-3193f381909b,5eecdc02-8fad-4c31-9db6-f97c4c42ad0d,ae15b560-7d44-42b9-656b-a5d7eed9ddab,0eb4a58b-3a8e-41ff-b239-753540c5b46b,6d328856-4933-4467-a92c-7ddac9725242,673ee7cb-29db-4be6-9c8f-e9f74201bc7a", "player.fr": "iv2_en-us_money_article_16x9-Investing-JubaksJournal"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=277a6b9c-acb8-4cbc-af99-90caf14345b5,0b1fd57a-3c12-4624-ab25-b126f4a34413,007ee6e4-31f1-4cff-9e54-db96b690564e,3575091f-2242-46ad-8eab-3193f381909b,5eecdc02-8fad-4c31-9db6-f97c4c42ad0d,ae15b560-7d44-42b9-656b-a5d7eed9ddab,0eb4a58b-3a8e-41ff-b239-753540c5b46b,6d328856-4933-4467-a92c-7ddac9725242,673ee7cb-29db-4be6-9c8f-e9f74201bc7a;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');It's still just a worry, mind you. And we won't head down this path to lower economic growth unless Japan gives signs that it's not content with a relatively small drop in the yen and Europe and China retaliate to protect their own exports. But the consequences would be so disastrous that I think it's worth understanding how this yen intervention could trigger "Smoot-Hawley II."

Find a broker who's right for you

The protection racket Let's start with a little history. The main goal of the 1930 tariff was to protect U.S. jobs and farmers after the U.S. economy entered what would become the Great Depression following the 1929 stock market crash. The tariff, championed by Sen. Reed Smoot, R-Utah, and Rep. Willis Hawley, R-Ore., raised U.S. tariffs on more than 20,000 imported goods. On some goods, the increase took tariffs up to 60%. The overall effective tariff rate climbed to 19.8% in 1933 from 13.5% in 1929.

Economists debate exactly how important the tariff was in creating the Depression. Although the overall tariff levels were the second-highest in U.S. history, the United States then, as now, wasn't an export-driven economy. In 1929, imports accounted for just 4.2% of U.S. gross domestic product and exports only 5%. Economists such as Milton Friedman and Anna Schwartz have argued (see their 1963 book "A Monetary History of the United States, 1867-1960") that monetary policy was a far more important cause of the Depression than tariffs or other demand-side policies.

But Smoot-Hawley definitely set off a global trade war that began even before the bill became law. By September 1929, the Hoover administration had received protests and threats of retaliation from 23 U.S. trading partners. Canada was the first to strike: In May 1930, it raised tariffs 30% on U.S. exports to Canada.

From 1929 to 1933, as the Great Depression bit and other countries raised tariffs to protect their own industries -- or found alternatives to trading with the United States -- U.S. exports fell 61%. U.S. imports fell even faster, by 66%. World trade collapsed as well, sinking 66% from 1929 to 1934.A yen for intervention It's the last part of this history that makes me worried about the global economy right now. Japan has moved to sell trillions of yen in an effort to drive down the price of its currency against those of its major trading partners. The intervention is designed to aid Japan's exporters, who were getting killed before the intervention as the yen climbed to 83 to the dollar. The Japanese government has argued that it needed to intervene because other countries (China is the name it won't say) are manipulating their exchange rates to subsidize their own exporters.

I can understand the temptation to intervene and protect Japanese exporters, and there is no doubt that China -- and other countries -- are keeping their currencies artificially cheap. But the argument that Japan needs to intervene in the currency markets because the yen is too strong doesn't hold water. Once you correct for years and years of Japanese deflation, the real yen-to-dollar exchange rate is pretty much where it has been for the past 25 years. Before the intervention, the real yen-dollar exchange rate index was at 100.2. The average for 1986 through 2010 was 100 on that index.

What Japanese exporters are really protesting is the end of the supercheap yen of 2002-07 that fueled Japan's export-led recovery of those years. And what they're looking for is a return to the good old days when, in 1995, Japanese exporters had 95% of the global DVD market and 40% of the global market for memory chips. By 2006, Japan's market share in those two categories had tumbled to 20% and 10%, respectively.

The real problem for the Japanese economy is that Japanese exporters have steadily lost their competitive edge in the global economy.

Continued: Exporters need importers More from MSN Money and MoneyShow.com Why there's such a dividend deluge

Jubak video: Will Japan's intervention help?

Is the US economy better than it seems?

Jubak video: Greek tragedy begins a new act

8 stocks for the market's next rally

2 years later: Financial crisis's winners and losers

1 | 2 | next >

Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=7.541667; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=48;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board Stock PicksJubak's Picks

Check out Jim's top stocks for the next 12 months.

Jubak's How To Start

Read how to invest with Jubak's showcase portfolio.

Jubak Picks 50

Follow the long-term portfolio from Jim's book "The Jubak Picks."

Dividend stocks for income investors

See Jim's new portfolio to help navigate the treacherous interest-rate environment.

Connect with JimBecome a fan on FacebookSubscribe to his e-mail newsletterDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Articles by Jim JubakWhy there's such a dividend deluge 09/16/2010Is economy better than it seems? 09/13/20108 stocks for the market's next rally 09/09/2010More...Jim's Most Recent Top Stocks PostsS&P ready to break out?Buy Intel on this big dipThe real reason JPMorgan roseFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8'); 4CommentsNewestOldestBestWorstControversialUnder 25 and love the work1 hour ago

Wow, well I certainly hope that this comment page can get a bit better than these first 3 - each of which has been tangentially connected to the article in its own misinformed way.

Lynn X - Mr. Jubak didn't speak about current politics because that was not the point of the article, go to a politics website if that is what you would like to discuss.

Surfing boy - welcome to the world. Most countries are out only for their own benefit. If you don't think that's true look at Russia who will undercut OPEC oil rates one day and sell weapons to Syria the next. China and Japan are going to look out for #1, and that's what keeps Mr. Jubak up at night.

anilbs - I'm not quite sure what you mean by overcapacity but if you're referring to manufacturing capacity well then I must apologize. I'm very sorry that western consumerism and western money has brought many countries from 3rd to 1st world and improved the lives of millions. Although I do agree that I and many other westerners need to save more that would actually be a bad thing for most of the heavy export countries as it would reduce demand for the "trash" that they produce even if the fed stops printing money today.

1 0ReportSpamanilbs3 hours agoHI,The world has too much overcapacity and all this due to reckless and i should say mindless consumerism in the west especially in the west . It was as if people in the west had forgotten what savings is and bought all those trash(imported items) as if there was no tomorrow. Now that chronic unemployment is there and there is a period of great structural change i hope the west will be careful in how much they spend. The east cannot depend on the spending of the west , those days are all gone unless the US prints even more dollars and risks reducing the value of the dollar. 0 0ReportSpamsurfing boy3 hours ago

What you do not understand is that 'China' is using just about any' trick' to acquire Western technology.

Their policies are all about 'China interests' and nothing else matter.

They will do just anything to have Chinese companies prevail in their Country

Its about time that we wake up to this' monster policy'.

I can suggest a few remedies like making their holdings of USA dollars not convertible!

0 0ReportSpamLynn X4 hours ago

Jubak - You talk about that stupid Utah Republican Senator in the in the great depression Reed Smoot. How about Utah Republican Bob Bennett who was defeated in the Republican primary after he and another Republican sponsored a bill to do away with medicare and replace it with two incentives. Probably incentives to go to work in your old age, all you old people. Bennett doesn't need to worry, he inherited wealth. Oh they have already have that with the no income for all you old savers who relied on interest type investments. Grab those canes and get down to the employment office now!!!!

2 1ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of ConductPlease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment? var initData = {"strings":{"lc_shw":"true","lc_dtf":"%M/dd/yyyy %h:mm tt","lc_dtf2":"ddd %h:mm tt","lc_gmt":"-5","lc_erg":"Comments are currently unavailable. Try again later.","lc_det":"Comments are unavailable on this page.","lc_pgf":"{0} of {1}","lc_1ach":"Comment","lc_ach":"Comments","lc_newm":"Newest","lc_oldm":"Oldest","lc_bestm":"Best","lc_worstm":"Worst","lc_mixedm":"Controversial","lc_prv":"Previous page","lc_nxt":"Next page","lc_pageNumTooltip":"Enter a page number, and then press the Enter key","lc_first":"First page","lc_last":"Last page","lc_rpl":"Reply","lc_rbs":"Report","lc_edt":"Edit","lc_del":"Delete","lc_pstthanks":"Thanks for posting to","lc_pstand":"{0} and {1}","lc_seemore":"See more . . . ","lc_seeless":"See less . . .","lc_rpttxt":"Thank you for reporting.","lc_msg2mod":"Send note to moderator . . .","lc_cc0":"Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates the","lc_cc1":"Code of Conduct","lc_cc2":"Please use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.","lc_cat":"Categories","lc_spa":"Spam","lc_che":"Child pornography or exploitation","lc_pro":"Profanity, vulgarity or obscenity","lc_cor":"Copyright infringement","lc_har":"Harassment or threat","lc_usrpic":"Inappropriate user picture","lc_oth":"Other","lc_abc":"Additional comments","lc_opt":"(optional)","lc_atl":"100 character limit","lc_rep":"Report","lc_1hourm":"1 hour ago","lc_1minm":"1 minute ago","lc_recomm":"You recommend this","lc_recomdontm":"You don\u0027t recommend this","lc_voted":"You have voted on this","lc_suicide":"Threats of suicide","lc_joi":"Be the first to comment","lc_shwm":"Show comments","lc_hidem":"Hide comments","lc_hourm":"{0} hours ago","lc_minm":"{0} minutes ago","lc_secm":"{0} seconds ago","lc_add":"Add a comment","lc_dmg":"Are you sure you want to delete this comment?","lc_dok":"Delete","lc_dca":"Cancel","lc_pna":"There\u0027s a problem creating posts right now. Please try again later.","lc_clt":"This discussion is closed. New comments cannot be posted.","lc_fta":"Be the first to comment","lc_fsg":"Be the first to add a comment. To add a comment, please","lc_sgn":"sign-in","lc_lnk":"Read comments","lc_spell_gen_err":"Could not check spelling. Please try again later.","lc_spell_no_mist":"No spelling errors found.","lc_spell_num_mist":"Spell check detected {0} mistake(s).","lc_spell_in_prog":"Spell check in progress...","lc_spell_check":"Check Spelling","lc_post_gen_err":"There's a problem creating posts right now. Please try again later.","lc_post_long":"Post cannot be longer than {0} characters.","lc_post_empty":"Your post cannot be empty.","lc_cmnt_day_max":"You already reached the daily limit for posts today. Please post again tomorrow.","lc_post_prog":"Post in progress...","lc_post":"Post","lc_save":"Save","lc_not_auth":"You are not signed in.","lc_no_suggest_paren":"(No suggestions)","lc_ignore_paren":"(Ignore)","lc_insrt_emot":"Insert Emoticon","lc_cancel":"Cancel","lc_ok":"OK","lc_fmt_quote":"Format as Quote","lc_incr_indnt":"Increase Indent","lc_decr_indnt":"Decrease Indent","lc_bullets":"Bullets","lc_numbering":"Numbering","lc_italic":"Italic (CTRL+I)","lc_bold":"Bold (CTRL+B)","lc_post_dirty":"Edits you have made to your post will be lost.","lc_rte":"Rich Text Editor","lc_ip_banned":"The computer or device you are using is temporarily banned from posting on this site. People or automated programs have recently used this computer or device to create unwanted posts. You may still browse the site and read other people's posts, but you can't create, edit, or delete posts.","lc_chk_msg_spell":"Check message for spelling errors (F7)","lc_post_msg":"Post this message (CTRL+ENTER)","lc_perm_ban":"This Windows Live ID was banned for violating the Code of Conduct. You may still read other people's posts, but you can't create, edit, or delete posts.","lc_temp_ban":"This Windows Live ID is banned from posting on this site until {0}. You may still read other people\u0027s posts, but you can\u0027t create, edit, or delete posts. ","lc_also_pst_fb":"Facebook","lc_also_pst_wl":"Windows Live","lc_also_post_to":"Also post to:","lc_idnt_settings_err":"Could not save your settings. Try again later.","lc_idnt_nick_prohibited":"The nickname you requested is not allowed. It may contain a reserved name or profanity. Please enter another nickname.","lc_idnt_nick_unavail":"The nickname you requested is not available. Please enter another nickname, or select one of these suggestions:","lc_idnt_nick_empty":"Nickname cannot be empty","lc_idnt_nick_max_len":"Nickname cannot be longer than {0} characters","lc_idnt_nick_allowed_chars_err":"You nickname may only contain letters, numbers, hyphens, underscores, and periods. Please enter another nickname.","lc_idnt_lnk_msn_wl":"Link your MSN posts to your profile on Windows Live","lc_idnt_posting_name":"Now when you post with your \u003cstrong\u003ename\u003c/strong\u003e, all of your past and future MSN posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_idnt_posting_nick":"If you keep posting with your \u003cstrong\u003enickname\u003c/strong\u003e, your posts aren't connected to your profile on Windows Live.","lc_idnt_name_nxt_psts":"The name you choose appears next to all of your past and future MSN posts.","lc_idnt_post_w_name":"Post with my name","lc_idnt_kp_post_w_nick":"Keep posting with my nickname","lc_idnt_chs_name":"Choose the name that appears next to your posts","lc_idnt_name_lnk_wl":"If you post using your name, your posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_idnt_nick_no_wl":"If you create a nickname, your posts are not publicly connected to your profile on Windows Live.","lc_idnt_post_w_nick":"Post with a nickname","lc_idnt_enter_nick":"Enter nickname","lc_idnt_post_w_yr_name":"Post with your name","lc_idnt_mst_use_name":"You must now use your name when you post here.","lc_idnt_note_post_w_name":"Note: When you post using your name, your posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_continue":"Continue","lc_idnt_create_nick":"Create a nickname","lc_idnt_nick_nxt_pst":"Your nickname appears next to your posts on MSN.","lc_idnt_nick_allowed_chars":"Nicknames may contain letters, numbers, hyphens, underscores, and periods.","lc_cmnt_unavail":"Commenting is currently not available. Try again later.","lc_loading":"Loading...","lc_signin":"Sign in","lc_signin_create":"Sign in with your Windows Live ID, or create a new one.","lc_spam_msg":"Your post was blocked because it appears similar to spam or automated messages. If this is not the case, revise your post and try again.","lc_wrt_cmnt":"Write a comment...","lc_avtr_pic":"User Picture","lc_edit_cmnt_err":"Could not load comment for editing. Try again later."},"isCommentShow":"true","_p":"","locale":"en-us","forumId":"00120065-0000-0000-0000-000000000000","forumTitle":"MSN Money","boardId":"00000065-02a6-0000-0000-000000000000","boardTitle":"ArticleComments","threadId":"4191f91c-3352-4443-91cd-b2a910c52174","title":"Article Comment","userId":"b5e44170581cc833","contentId":"aj993pae7naxtjkatkdmbfd8kbkvaahu","pageUrl":"http://articles.moneycentral.msn.com/Investing/JubaksJournal/the-recipe-for-another-depression.aspx","appUri":"http://social.msn.com/boards","cssBaseUrl":"http://blstc.msn.com/br/scp/css/15/","emoticonBaseUrl":"http://us.social.s-msn.com/s/","responseBridgeUrl":"http://articles.moneycentral.msn.com/scp.aspx","cmntSharingOn":true,"cmntSharingNetworks":[{"id":0,"locKey":"lc_fb","tooltipLocKey":"lc_also_pst_fb"},{"id":1,"locKey":"lc_wl","tooltipLocKey":"lc_also_pst_wl"}],"omniAccount":"MSNPORTALSCP","currentPage":1,"totalPages":1,"sortOrder":0,"isAuth":false,"signInUrl":"http://login.live.com/login.srf?wa=wsignin1.0&rpsnv=11&ct=1285060490&rver=5.5.4177.0&wp=LBI&wreply=http:%2F%2Farticles.moneycentral.msn.com%2FInvesting%2FJubaksJournal%2Fthe-recipe-for-another-depression.aspx&lc=1033&id=250710","genericAvatarUrl":"http://us.social.s-msn.com/s/images/bluemann.png","settingsCookieDomain":"msn.com"}; scpjs.Comments.init(initData , false, true); /*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*