All posts by Sam Ho

I am currently a fourth-year Economics student with a desire to pursue a career in the capital markets. I enjoy learning about the global financial markets and reading investment research strategies. I look forward to contributing to the Economics Society as a Global Topics writer.

Implications of a Strong USD

After Donald Trump’s surprise U.S. election victory and the Republicans’ full control of the Congress, the markets have reacted and the U.S. Dollar (dollar) has been continually surging – catching companies and investors off guard. The new U.S. administration seems to believe that this is a sign of “global confidence in Trumpism”, but there are many concerns for U.S. exporters towards an overly strong exchange rate [1].

A strong dollar is defined as one that can purchase more foreign currency relative to a weak dollar. This means that U.S. consumers will pay less for imports but foreign consumers will pay more for U.S. exports [4]. This is good for U.S. consumers as the appreciation of the dollar against other currencies makes foreign goods and foreign travel cheaper, both of which American consumers enjoy. However, this negatively affects tourism as the United States becomes a less affordable travel destination [3].  

A second consideration is the impact of a rising dollar on the earnings of U.S. companies with large foreign operations [5]. In 2012, for companies in the S&P 500 that provided foreign sales details, 47% of total sales came from abroad, mainly Europe and Asia. Clearly, a stronger dollar would have a negative effect on net exports produced domestically, thus creating a drag on potential earnings. Interestingly, one can consider that “truly global U.S. –based” companies involved in exports do not produce within the U.S., but rather internationally [6]. The effects of globalization in the past decades have allowed companies the ability to purchase materials and set up factories abroad, which means that the rising dollar does not have a huge negative relationship with production as initially understood [2]. The real issue is when the earnings in foreign currencies are converted back to the domestic currency, as companies will feel the full brunt of the reduced returns.

As an example, Apple, the world’s most valuable company and a company known for their international dominance, faces some of the greatest foreign exchange exposures with 22% of their sales from China and 23% from Europe [1]. In the past quarter, Apple reported its biggest hit to its margins in China, about 3% in revenue growth, due to the weakness of the Chinese RMB against the dollar. Luca Maestri, Apple’s finance chief, has suggested the company has been preparing for further dollar strength but has come to realize that “at some point, the strong dollar becomes the new normal and we need to work with that” [1].

Unemployment Rate in the United States averaged 5.81 percent from 1948 until 2017. The unemployment rate is currently at 4.8% in January 2017.

On the positive side, a higher dollar effectively transfers demand from the U.S. economy to other economies around the world [5]. The U.S. unemployment rate is currently below its 50-year average and is showing signs that it will continually decrease. By contrast, other economies, notably in Japan and emerging Asia countries, would benefit greatly from a boost to their exports as a result of a higher dollar. In the long run, this will develop a stronger and more balanced global economy [5].

The strong dollar will remain a concern in the coming years as President Trump moves to revive domestic production. As it currently stands, having a stubborn stance for domestic development may harm the U.S. in the long run with reduced export potential; however, the strong exchange rate will be hugely favoured by American consumers. The rise of the dollar in 2016 will have impacts well into 2017, and those impacts should be considered positive on a global scale in the U.S. and around the world [5].


[1] https://www.ft.com/content/8399c6a2-aa82-11e6-ba7d-76378e4fef24
[2] http://fortune.com/2015/03/04/strong-dollar-effects/
[3] https://www.thestreet.com/story/13327355/1/3-impacts-of-a-strong-dollar-weigh-on-next-week-s-fed-meeting.html
[4] http://www.infoplease.com/cig/economics/dollar-us-economy.html
[5] http://www.barrons.com/articles/3-ways-a-strong-dollar-impacts-the-global-economy-1413236429
[6] https://hbr.org/2015/10/strong-dollar-weak-thinking

Japan’s Negative Interest Rate Story

Bank of Japan in Chūō, Tokyo

Central Banks around the world have wrestled with low-interest rates, but nowhere have they grappled with them for longer than in Japan [5]. Investment in Japan as a percentage of GDP has been on a downward trend for more than two decades. To combat these persistent bouts of deflation, the Bank of Japan (BoJ) pioneered a monetary strategy known as “quantitative easing” (QE). The main function of QE is to depress long-term interest rates by buying vast amounts of government bonds through printed currency [1].

Employing this technique led the BoJ to introduce negative interest rates in January 2016. Although this was 20 months after negative rates were first issued by the European Central Bank (ECB), Japan had already faced stagnated interest rates, reaching as low as 0%, since 1999 [5]. Prior to entering 2017, Japan once again reviewed their monetary policy in hopes to kick-start growth, as intended for the past two decades. After the two-day policy meeting in December 2016, the BoJ left that policy unchanged, planning to: maintain the negative 0.1% interest rate on excess bank reserves, leave the 10-year Japanese Government Bond (JGB) at a yield target of 0 bps, and keep annual rises in JGB holdings to 80 trillion yen (676.9 billion USD) [4].

The implications of negative interest rates mean depositors must pay money to set aside reserves, which is a reversal of the common understanding of economics [1]. Depositors are commonly known as banks, and their relationship with the Central Banks are similar to regular people who keep accounts at a local bank. This relationship normally allows depositors to receive a small amount of interest in return for leaving their money with the Central Bank. However, with the introduction of negative rates, Central Banks charge depositors a negative rate on principal kept in excess reserves. This strategy is meant to encourage the productive utility of money for depositors by lending more frequently to consumers and businesses. Negative rates are then supposed to send a ripple effect through the economy by lowering the cost of borrowing for everyone – which should in turn stimulate economic growth [1].

Japan’s core inflation rate since 1971.

Japan has been dealing with low-interest rates since 1995, never moving higher than the 0.5% rate which was slashed to zero in 1999. Despite the lower borrowing costs, consumer demand has weakened, which created deflationary pressure on the country [2]. “There should be some threshold where corporations will start to take cash out of their vaults and put it to work,” said Masaaki Kanno, Japan chief economist at J.P. Morgan. The solution the BoJ seeks is to drop its benchmark rate further, in an attempt to trigger inflation. It is conceivable that rates may drop to as low as -0.7% [2].

The greatest difficulty the BoJ now faces is timing. As the U.S. Federal Reserve announced their first of several rate hikes in 2017, the consequences are still unknown for Japan. Additionally, the yen has tumbled 10% percent post-U.S. election. A weaker yen generates inflationary pressures through higher import costs and greater corporate profits: in turn this diminishes the effectiveness of Japan’s monetary policy [3]. A premature rate hike might risk increasing the strength of the yen, making it much more difficult to reach the inflation target. As Heizo Takenaka, a professor at Toyo University and Japan’s former Minister of State for Economic and Fiscal policy puts it best, “Despite the criticisms of negative interest rates, Japan lacks alternatives” [2].


[1] https://www.nytimes.com/2016/09/21/business/international/japan-boj-negative-interest-rates.html
[2] http://business.financialpost.com/news/economy/japan-in-transition-rest-of-world-watches-as-country-tries-negative-interest-rates-to-spur-economy
[3] https://www.bloomberg.com/news/articles/2016-12-20/boj-keeps-policy-unchanged-as-weak-yen-brightens-price-outlook
[4] http://www.cnbc.com/2016/12/19/bank-of-japan-holds-rates-steady-as-expected-kuroda-press-conference-awaited.html
[5] http://www.economist.com/news/finance-and-economics/21712134-biggest-lenders-can-largely-shrug-negative-rates-many-smaller-ones