Dr. Mike Campbell

Japan has suffered from a major natural disaster which left well over 20000 dead or missing and caused massive destruction to areas in the north east coastal region. The nation’s infrastructure was badly affected and the power supply is still disrupted. The nation has the largest debt burden of any in the developed world; it is suffering from deflation and the highest levels of unemployment since World War II; the population is aging and so health care and social costs will rise; the costs of reconstruction will run into hundreds of billions of dollars – yet the currency continues to rise against other majors.

The Japanese economy is export-led and so a high Yen makes it harder to sell Japanese products on international markets if they are priced in Yen. Pricing them in local currencies means that the product remains competitive, but profits are reduced when the proceeds are repatriated to Japan. Unsurprisingly, the Japanese economy has fallen back into contraction since the 11th March catastrophe.

In the aftermath of the natural disaster, the Yen appreciated against other major currencies to such an extent that the G7 acted in concert to weaken the currency because of fears that a high Yen would hamper Japan’s economic recovery from both the disaster and the global financial crisis. Whilst the move weakened the Yen and moved the Dollar back from record lows against the Yen, over the intervening five months, the Dollar has again fallen to fresh lows. The decline of the Euro, Dollar and Sterling against the Yen has been driven by fears over the sovereign debt crisis (mainly in Europe), the weakness of economic recovery and the required austerity measures which are needed to get financial houses in order in these areas. Japan’s Yen is perceived to be a better bet than these other currencies by the markets although Japan is in no better position from a fundamental economic standpoint.

The Bank of Japan has intervened in the markets to sell Yen thereby making the value of the currency fall. The exact details of the intervention have yet to emerge, but it was sufficient to push the Dollar up from ¥77 yesterday to ¥79.43 currently. The question is whether the effect will be long-lasting or not.