- Markets & Risk Newsletter
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The Rising Yen - Yen Rises in Value as Global Currencies Slide In December of 2006, you could exchange 120 Japanese yen for one U.S. dollar. A year later the yen went for 110 per U.S. dollar. In December 2008? Your dollar bought 90 yen. Forecasts through the third quarter of 2009 see little change. Why has the yen continued to appreciate, and what are the consequences for investors? Experts offer a variety of reasons for the yen’s strength against the dollar. Some may be the result of U.S. economic policy. Since the U.S Federal Reserve slashed interest rates to virtually zero in an effort to bolster the ailing U.S. economy, the dollar has slumped against both the yen and the euro. The currency carry trade has favored the yen because of Japan’s historically low interest rates. Why? Say a speculator borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars, and for the equivalent amount buys an asset such as a bond. If the bond pays five percent and the Japanese interest rate is one percent, the trader could make a profit of four percent as long as the exchange rate between the countries does not change. Such loans have to be repaid in yen. If the asset loses value and must be sold, the speculator has to buy yen. Since over a long period of time there has been an accumulation of position, the buyers of yen outnumber the sellers of yen. Supply and demand then drive up the price of yen. Once a trend is set, speculators respond to the trend and drive the price of yen even higher.
What’s the effect on investors and consumers? First, there’s an impact on U.S. exports. The appreciation of the yen against the dollar means that American products become cheaper in Japan. This is good for U.S. companies exporting to Japan, especially the auto industry. Japanese companies face a double challenge. As global demand for Japan’s cars and electronics is shrinking, the strong yen makes their exports more expensive and hurts repatriated earnings. According to the Bank of Japan, a stronger yen is likely to trigger increased imports, fewer exports, lower investment, and, due to stronger purchasing power, higher household consumption. But the latter has not happened because traditionally thrifty Japanese consumers are saving rather than spending. In the past decades Japan, like its neighbor China, has had an export-orientated growth. Hiromichi Shirakawa, chief Japan economist at Credit Suisse, recently commented that yen appreciation usually accompanies strong exports, which is acceptable, but the situation at the moment is a disastrous combination. Japan is in a recession right now because capital spending has declined and exports have fallen more than expected.
What’s the Japanese government response? As the yen rises to new highs against the dollar, many wonder whether Tokyo might be prodded into its first intervention in the currency markets since 2004. To bring down its currency, Japan can order the Bank of Japan to sell yen. Shoichi Nakagawa, the finance minister, recently stated that intervention “isn’t in my mind at all.” But he did add he was tracking currency movements with “great interest” and was “shocked” by the sudden moves. Finance Minister Shoichi Nakagawa told reporters: “The acceleration in the yen's strength is a negative factor for Japan's export industry. It is my role to take a necessary policy.” The value of currency on the open market has tremendous implications for speculators who buy and sell currency, for international investors, and even for consumers. For information on powerful risk-management tools that will allow you to track and correlate currencies, contact PortfolioScience today. |
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