By: Dr. Mike Campbell

The Yen has acquired the status of being a safe haven currency in the current turbulent forex marketplace. Since the Bank of Japan is maintaining a zero percent interest rate, investors in the Yen are gaining from the strengthening of the currency and see only minimal return on their holdings. The downside for Japan is that a strong Yen causes their exports to be more expensive in importing markets, reducing their competitiveness. Given that Japan has its own debt mountain, the largest of any democratic economy; record unemployment (by Japanese standards, but still enviable in terms of most of its competitors); an aging population (with ever increasing social security and healthcare costs); entrenched deflation; and is recovering from the worst natural disaster in its history, one is reminded of the parable of the man who built his house on sand…

The Yen situation is a factor in the investment strategies of Japanese manufacturers. Investment in business expansion plans has fallen to ¥7.7 trillion for plant and equipment in Q2, a decline of 7.8% on the previous year. It is the first year-on-year decline seen for four quarters and reflects continuing fears over Japan’s economic growth.

When you factor in the observation that the economic “recovery” is faltering in both Europe and America, two of Japan’s most important trading partners, it is easy to see why investment is down. A second facet of a strong Yen is that when overseas profits (in foreign currencies) are repatriated, they represent a smaller Yen sum, hurting a Japanese business’s bottom line.

The Japanese authorities have twice intervened in the markets to devalue the Yen and the G7 acted in concert to the same end in the aftermath of the natural disaster which, inexplicably, had sent the Yen higher. However, although these interventions caused a short-term depreciation of the currency, the Yen soon climbed to fresh highs.