Japan’s a mess – so why is the yen so strong?

Japan’s yen has hit 15-year record highs in recent weeks.

A towering national debt, a revolving door of prime ministers and an export-driven economy limping slowly from its worst economic slump since World War II – Japan’s got it bad.

So why is the yen trading at 15-year record highs?

A number of factors have combined to pump the yen up to 83.36 per dollar on Tuesday, the highest since May 1995.

First, to set the scene: In June 2007, the yen was trading at 122.64 against the U.S. dollar – its highest level in five years. Then the U.S. subprime loan market imploded. Japanese who invested in other currencies with higher yields – known as “carry trades” – brought that cash back home as other currencies, particularly the dollar, was hit by the crisis.

The yen’s natural strength lies in the country’s trade surplus. Cars, electronic goods and other Japanese products sold abroad brings a healthy stream of yen back home. Add to that the influx of cash investors brought back to Japan as the global economy crashed, and the yen continued to strengthen.

Another factor: Countries and investors diversifying away from the dollar in the wake of the crisis were looking for a safe investment, and the yen was a popular choice. Most notably, Beijing has been snatching up a record number of Japanese government bonds instead of U.S. ones.

“That to me explains largely what is happening to the yen in the face of what is reasonably dark economic news and a difficult political situation,” said Benjamin Pedley, head of investment strategy in North Asia for HSBC Private Bank.

And that adds to the difficulties for Japan’s recovery – a strong yen cuts the profits of its products abroad.

The markets are waiting to see if the saber rattling among Japanese politicians on the skyrocketing yen will turn into a government intervention to lower the value of the currency. The government hasn’t taken such steps since 2004.

But Pedley doubts any intervention by the government will have any long-term effect on the strength of the yen. Trading partners in Europe and North America, on balance, would prefer a stronger yen. “The problem is, any intervention would be unilateral – they won’t have any cooperation,” Pedley said.

With the re-election of Naoto Kan as head of his party - and as Japanese prime minister - the markets are betting that the yen will remain high. The Tokyo markets closed before the vote, but hit a fresh 15-year high on the belief that Kan would survive the internal challenge from Ichiro Ozawa, who favored a strong intervention in the markets.

Japan intervenes to weaken yen

September 15, 2010 – Updated 0729 GMT (1529 HKT)

* Noda: Yen's sharp gains from Tuesday were "a problem that could not be overlooked"
* Decision to intervene gives Kan opportunity to show leadership, traders and analysts say
* Kan won leadership challenge from party heavyweight Ozawa Tuesday
* Yen has been trading at a 15-year high against the dollar

(FT) – Tokyo intervened in the currency markets for the first time in more than six years to weaken the yen, after the currency broke through Y83 against the U.S. dollar and threatened exporter profits and business sentiment.

The unilateral intervention on Wednesday morning sent the yen down as much as Y1 within an hour and gave the Nikkei 225 and its exporter constituents a boost. However, the action came at a sensitive time that could cloud the debate over China’s control over the renminbi.

Yoshihiko Noda, the finance minister, told reporters that the yen’s sharp gains from Tuesday – following Prime Minister Naoto Kan’s victory in his Democratic party’s leadership battle – were “a problem that could not be overlooked,” given that the Japanese economy has suffered some difficulties, including its ongoing struggles with deflation.

“In order to restrain excessive moves in the currency market, we earlier carried out currency intervention,” Mr Noda said. He added that he was prepared to take further action, including further intervention, if necessary and that overseas authorities had been contacted.

Yen intervention remains a political matter over and above an economic one, and the decision for the government to intervene gives Mr. Kan the opportunity to show leadership, according to traders and analysts. A trader said that the lull after Tuesday’s DPJ vote gave the authorities a chance to catch the market by surprise.

The action is being interpreted as what is known as a smoothing operation, which is carried out to flatten sudden moves in the currency, rather than to send the currency to a specific point, according to traders. Yo****o Sengoku, chief cabinet secretary, suggested to reporters that the finance ministry saw levels of Y82 as a line of defense for the economy.

Before the intervention, the dollar had continued its decline against the yen to as low as Y82.88 in morning trading in Tokyo, extending losses overnight, in spite of upbeat consumer spending data from the U.S. Traders had also been testing the resolve of Mr. Kan to stay out of the market after he won a leadership challenge from party heavyweight Ichiro Ozawa on Tuesday.

The intervention began around 10.30 a.m. Tokyo time, after which the yen dropped as low as Y85.14 and was last trading at Y84.84.

Mr. Ozawa had been seen by markets as more likely than Mr. Kan to intervene to curb the rise of the yen, which had been trading at a 15-year high against the dollar and prompted complaints from the business sector.

The stock market jumped 2.8 per cent to 9,557.85 as of mid-afternoon trading in Tokyo, reversing an earlier 1.1 per cent decline.

Japan’s intervention is likely to heighten tension around the already charged issue of China’s persistent intervention to hold down the renminbi, which was set to be one of the most contentious issues at the forthcoming meeting of the G20 group of countries in Seoul.

The US is disappointed that China has allowed the currency to rise by less than 1 per cent against the dollar after its decision to unpeg the renminbi in June. This week, Congress will hold a series of hearings to investigate the options for blocking Chinese imports or having the currency intervention declared illegal by the World Trade Organization.

Japan’s intervention is likely to complicate the debate. Several G20 countries, including the U.S., feel that they are under competitive threat from China’s currency policy. But the fact that Japan is intervening against its currency – at a time when the yen is not particularly strong in real terms – will make it hard to point at China as the one major economy that is manipulating its exchange rate.

Tetsufumi Yamakawa, head of research at Barclays Capital in Tokyo, said Japan’s intervention “at least, would give a good excuse to China for not moving by claiming that the Japanese authorities are manipulating the currency [as well].”

He said that this consideration probably had put Tokyo off intervening for such a significant amount of time.

Speaking before Tokyo’s intervention, Fred Bergsten, director of the Peterson Institute think-tank in Washington and an advocate of litigious and legislative confrontation with Beijing, said that the US needed to organize a coalition of countries, including Japan, to put pressure on China at the G20.

Debate as to if and when Tokyo would intervene had also been intensifying, given that previous unilateral interventions in the market had only proved successful over the short-term, such as days or weeks.

Moreover, the last time that the finance ministry ordered the central bank to intervene over a 15-month period of 2003-04 left it with unrealized losses of Y32,300bn in its foreign exchange special account.

There is also an argument over whether the yen is really strong or not. Nominally speaking, it has been trading at 15-year highs. However, adjusted for prices and trade weighted to include a basket of currencies used by countries that Japan trades the most with, shows a very different picture.

Isn’t is simply because everywhere else is in a worse mess?

Ha, that’s kind of what I was thinking.

Can’t believe I missed such a good oppurtunity to piggyback ride that wave. It’s been freaking stated out in broad daylight that they would try to make it weaker for a few days now lol.

lol yeh would have been cool, But Im still a newbie and the yen is an alien currency to me, so for time being I’m sticking to EUR/USD EUR/GBP GBP/USD. oh well, live and learn…

I guess yen is still strong because all we know, not only Japanese, almost all the people in the world trust Japanese products and quality.

24 September 2010

[B]Yen weakens on reports of further Bank of Japan action[/B]

Japan’s central bank is believed to have intervened for the second time in a week to combat the rising yen.

Traders in Tokyo said a sudden jump in the dollar’s value on Friday was due to the bank’s selling of yen.

Weakening the yen’s value is designed to help Japanese exporters and bolster Japan’s fragile economic recovery.

Last week, the Bank of Japan began buying dollars on a large scale for the first time in six years, and said it was ready to take further action.

In afternoon trading in Tokyo, the dollar jumped suddenly from mid-84 yen to as high as 85.38 yen before slipping back to 85.07 yen.

“It appears that authorities have intervened,” said Yu Yokoi, a foreign exchange dealer at Mizuho Bank.

The Bank of Japan has not confirmed the latest move, although traders said it was unlikely officials would provide a running commentary on its interventions.
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The yen recently hit a 15-year high against the dollar, hurting Japan’s car and electronics exporters by making their products less competitive overseas and eroding the value of profits brought back from overseas.

Japanese exporters praised last week’s intervention.

“From the standpoint of aiding the competitiveness of Japan’s manufacturing industry, we applaud the move by the government and the Bank of Japan to correct the yen’s strength,” carmaker Honda said in a statement.

I think that Yen got strong becouse the governement wanted to stimulate the inside markets. The export markets of Japan crashed becouse of economic crisis but the japanese markets have stil a good opportunity. This is just what I think. With a strong currency you can bay more services and products with the same unit than with a weak curency. Anyhow, the japanese products are competitive by quality and not by price.

On the other hand the US has to lower the international value of USD in order to help the exporters.

The EU is in the middle of this.