By: Dr. Mike Campbell

The Yen has continued to appreciate against the other major currencies despite the clear wishes of the Japanese government and the Bank of Japan. The currency is near a fifteen year high against the US Dollar and is trading at the highest level it has seen against the Euro for nine years.

The Bank of Japan has signalled that it will pump more money into the Japanese economy by providing commercial banks with low interest loans. The hope is that the money will be lent out to businesses cheaply (at a mark-up, of course) and will stimulate the flagging Japanese economy. The Bank of Japan has increased the provision to the commercial banks by 10 trillion Yen (~$117bn) which brings the total funding available through the measure to 30 trillion Yen.

Unfortunately, increasing the availability of funding to commercial banks by a third did not impress the currency markets. Gains that the Euro and Dollar had made in recent trading were erased yesterday as the Yen stayed stubbornly high. Overtures that Japan had made to certain of her trading partners, notably America, that the major nations should act in concert to help devalue the Yen went unheeded. A high Yen puts pressure on Japanese exports since they become more expensive in foreign markets. This tends to improve the balance of payments with Japan as her trading partner’s exports are cheaper in the Japanese market, helping to stimulate demand and, consequently, production in those nation’s economies.

In other words, a high Yen is bad for Japan, but may not be such bad news for her trading partners – unless they can only get the exports that they need from Japan and so have to pay a higher price, of course.