Wednesday, June 13, 2007

Seems It Was Only Yesterday.....

...or actually it was more like 8 months ago, but anyway, it wasn't very long time ago that I reported that the Chinese yuan rose above the 15 yen barrier. As I pointed out then, that represented a significant increase from the mere 12.5 yen the yuan cost back in early 2005. But as the yean have fallen against most currencies -reaching record lows against the euro and 5 year lows against the U.S. dollar- due to the so-called carry trade, the yuan have steadily increased -albeit only slowly- against the U.S. dollar. As a result, the yuan today broke through the 16 yen barrier.

The steady appreciation of the yuan versus the yen , if continued, means that the shift in economic power in Asia from Japan to China is going very fast. Japan's likely 2007 GDP is in yen terms 22 times China's GDP in yuans. Which at a yuan/yen exchange rate of 15 means that Japan's GDP is 37.5% bigger than China's. With an annual rate of appreciation of 10% and with nominal yuan GDP growth in China being 10% higher than nominal yen GDP growth in Japan, China could overtake Japan as Asia's biggest economy as early as 2009.

But then again, this presupposes that the current yen weakness will go on, which while certainly possible is far from certain.


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