Thursday, September 16, 2010
China is now focused on the Yen
China has increased their purchases of Japanese yen. This action will cause the yen to appreciate and the yuan to depreciate. China's goods will be less expensive relative to Japans'.This is important for a couple of reasons. First China must see increased competition from Japanese exports. Second they are moving away from dollar dominated assets. The latter could prove costly for the United States. Right now we are heavily dependent of foreign purchases of US debt. If China is committing to Japan's debt this could cause a depreciation in the dollar. As investors expect the dollar to decline they will demand greater interest rates. In the end, this could greater increase the cost of running large government deficits.