Friday, March 18, 2011

Why is the yen appreciating?

The destruction of the capital stock in Japan will reduce the marginal productivity of labor (each worker has less capital to work with), which will put downward pressure on Japanese wages, and raise the returns to Japanese capital (it is scarcer and more valuable).  The higher returns to capital in Japan should attract capital inflows, which should put upward pressure on the yen.

HT:  Laffer Associates

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