Land of the Rising Yen

on Aug 27, 2012

After being sold steadily last week, losing 1.7 per cent against the US dollar to close at about 79.60 at week’s end, the Japanese Yen has again surged in international trading. Japan’s weak trade figures for July and hints of further monetary easing from the US Federal Reserve, along with other factors influencing investors, have helped the yen recover most of its recent losses. In response, politicians and economists have increased their calls for the Bank of Japan to buy foreign bonds to stem the currency’s appreciation, given that external factors seemingly remain ineffective in pegging back the yen.

On August 22 Japan reported its biggest ever July trade deficit, as exports slumped to the country’s third most important trading partner, the EU. In the wake of that disclosure, the yen surged against most major currencies. And on that same day when the July trade figures were posted, the minutes of the rate-setting Federal Open Market Committee noted that the US Federal Reserve was set to ease monetary policy, portending of a weaker US dollar. As market participants weighed that prospect, traders seeking safety set their eyes on the yen. In consequence, the surge which followed the release of those minutes heralded the end of the previous week’s brief respite.

!m[](/uploads/story/338/thumbs/pic1_inline.png)According to the FT, however, there is no shortage of forces with the potential to peg back the yen. Candidates include higher US interest rates, encouraging dollar-buying as investors take account of a wider yield gap. The recent cross-border M&A (mergers & acquisitions) binge by Japanese companies should also help depreciation, implying as it does more yen in the market. But against those factors that can potentially bring the yen down, there are others which may keep upward pressure on the Japanese currency. In search of stability, overseas investors continue to pile into the bonds of Japan, the world’s largest creditor nation. Another factor likely to be propping up the yen at present is that Japan’s corporate world, also known as Japan Inc, is repatriating foreign earnings before the midpoint of the fiscal year.

Overall, the yen’s appreciation is becoming chronic and, while responsibility for the value of the currency lies with the government, it can be noted that the yen’s worst run of the past three years – in February, when it shed 7.5 per cent against the dollar over a five–week period – came after the Bank of Japan (BoJ) appeared to take a more aggressive stance on arresting the country’s deflationary spiral. The central bank set a one percent inflation target and boosted bond buying in February to convince markets it was serious about pulling the economy out of deflation.
But the BoJ well knows that Japanese exporters are struggling, and its one per cent goal for inflation seems as distant as ever. Accordingly, BoJ governor Masaaki Shirakawa is facing ever more intense pressure to act against the strengthening currency, with both exporters and forex traders expecting further decisions to be made in the short term.


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