Japan’s New Line In The Sand

The Yen has been regarded as a “safe haven” currency since the onset of the global financial crisis. The initial rise in the Yen was triggered because many foreign businesses and individuals had taken out Yen loans, taking advantage of the Bank of Japan’s zero interest policy. As the storm clouds of recession gathered, the Yen fell from a high of 170 against the Euro to just 106.5 in August 2010. The initial imputus for this was the redemption of these loans which created a strong demand for the Yen. The current round of Euro sovereign debt blues has seen a new low of 102.3 (23^rd September 2011) from which the Euro has just started to recover.

From the Japanese perspective, a strong Yen is a headache. On the positive side, imported goods and raw materials (almost all of which Japan must import) are cheaper, but this fuels the purchase of foreign goods in the domestic market. On the negative side of the ledger, Japanese exports are more expensive in importing nations, harming their competiveness and foreign earnings are worth less when repatriated to Japan.

The Japanese authorities announced on Friday that they would act to prevent further appreciation against the US Dollar. This will be the fourth intervention in recent months; if the pattern is followed, the Yen will depreciate strongly in the short term and then return to its current value within a time frame of weeks. According to the Japanese Finance Ministry, $196 billion is available to stabilise the currency. The move comes in a bid to bolster economic activity in Japan which is currently in a recession, due to the slowing global recovery and the effects of March’s earthquake and tsunami.