I am going on a trip to Japan and was having a conversation about costs with a friend who is smarter than me. He told me how things aren’t as affordable as several years ago, because the Yen has strengthened. I glanced at a chart and can see that 1 dollar is worth about 150 yen today, compared to about 100 yen 5 years ago.
I understand there are many factors at play (globalization, inflation, tourism), but I just can’t wrap my head around how exchange rates can be pointed to as an indicator of general economic prosperity.
Say a widget sold in Japan today is priced 150 yen. This price can be translated to 1 dollar. The yen continues to rise for a few years, and the purchasing power of a dollar remains completely stagnant. The exchange rate is now 200 yen to one dollar. In a vacuum with zero change in demand, wouldn’t the seller of the widget just price his widget at 200 yen to extract the same purchasing power out of the consumer?
Any replies are much appreciated.
How does currency strength directly affect the purchasing power of a tourist?
byu/garbagoid inAskEconomics
Posted by garbagoid
2 Comments
If $1 buys 100 apples today and $1 buys 150 apples tomorrow – would you say that the price of apples has risen?
A couple of things:
When you say the Yen continues to rise, you’re not using the right terminology, as in your example, the Yen is actually dropping in value.
Sometimes people get confused specifically with Japanese Yen because it’s not always intuitive to have something with a 150 to 1 USD ratio.
Terminology aside, the answer to your question is that you aren’t thinking in Japanese domestic terms.
The Japanese have Yen, earn Yen, and pay in Yen. So, a change in the Yen price of the widget would have a significant effect on their domestic consumer, regardless of the USD/JPY exchange rate.
As an analogy, if you are US based, and things you buy increase in price dramatically, are you ok with that if the Yen value has changed? Nope.