Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Will Japanese Government Intervene to Weaken the Strong Yen?

Currencies / Japanese Yen Oct 13, 2009 - 03:05 AM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleIn the summer of 2007, Bear Stearns confessed it had spent $3.2 billion bailing out two of its funds that were exposed to the sub-prime market. At the same time, the yen carry trade marked its top. Soon thereafter, Bear Stearns went belly up, and the needle on the world’s sentiment shifted towards risk aversion.


Investors who had enjoyed a handsome return from borrowing cheap yen and using that yen to buy high-yielding currencies like the New Zealand dollar, the Indonesian rupiah and the Australian dollar went running for cover! They quickly found that the yen carry trade was like picking up pennies in front of a steamroller …

The success of this trade was highly correlated to the world’s dependency on easy credit. So when the warning signs started flashing that the credit bubble was bursting, the yen soared as investors fled those higher-yielding investments and bought yen to exit their trades.

As a result, since June 2007, the yen has gone up 28 percent against the dollar, its main trading partner.

Adding to that disadvantage, the yen has been exceptionally strong against the currencies of Japan’s key Asian competitors …

Since the middle of 2007, the yen has climbed:

  • 20 percent against the Chinese renminbi (or yuan),
  • 21 percent against the Singapore dollar,
  • 25 percent against the Thai baht,
  • 31 percent against the Indonesian rupiah,
  • And 43 percent against the South Korean won.

That’s a distinct position of weakness for the Japanese because it makes their exports significantly more expensive than their Asian competitors’. Of course, this is horrible news for an economy where exports make up 16 percent of total output! And even with improvements in the global economy, Japan’s exports are still down 37 percent from this time a year ago.

This is why Japan has experienced the worst contraction of all major economies and is expected to have the weakest recovery. And that’s why there is speculation that Japan could return to recession — as soon as the fourth quarter of this year.

Will a New Ruling Party in Japan Strengthen the Yen?

Hirohisa  Fujii revised his initial remarks about the yen.
Hirohisa Fujii revised his initial remarks about the yen.

Japan’s new ruling party, the Democratic Party of Japan, entered office last month. And the newly-appointed finance minister, Hirohisa Fujii, was happy to publicly comment on exchange rates.

But his initial remarks that a strong yen could actually be good for the economy caught the markets by surprise and sent the yen soaring even further …

Japanese exporters strongly disagreed with him. So the finance minister was reminded that when he said “good” perhaps he should have said “bad.”

Since then, Finance Minister Fujii has done an about face, joining other major countries with verbal threats against the strength of their respective currencies (in relation to a weakening dollar).

This means that as the U.S. dollar continues to give back its gains from last year’s crisis-driven flight to safety, the possibility of currency intervention by countries like Japan increases.

Japan’s Previous Yen Intervention

Japan has a reputation for being sensitive to movements in the currency markets and for taking action. Its heaviest periods of intervention tended to coincide with slower economic growth rates — like it’s experiencing now.

The last time Japan intervened to weaken the yen was between 2003 and 2004 …

Over the course of 126 days the Ministry of Finance purchased $315 billion and sold yen in the open market. These steps ultimately sent the yen 11 percent lower.

But the overall success of interventions in changing the long-term path of a currency is not great. A lot depends on how it’s done …

Manufacturers and exporters would welcome an intervention weakening the yen.
Manufacturers and exporters would welcome an intervention weakening the yen.

Changing the path of a currency tends to have a higher success rate when countries act together in support of (or against) the same currency. These coordinated interventions also have a greater spillover effect on other currencies.

Last weekend, leaders from the G-7 met in Istanbul. Although all G-7 members have made increasingly frequent individual statements about currencies, the G-7’s collective message on currencies didn’t change! It was identical to its communiqué of April that said:

“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate.”

So when you consider the theme of coordination in the policy responses to the global crisis, if a major currency intervention takes place, the probability of a coordinated response in currencies is high.

And for Japanese exporters dealing with a yen near 14-year highs against the dollar … that would spell relief.

Regards,

Bryan

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in