Japan’s currency, the Yen has been seen as a “safe haven” currency as the storm of the global financial recession raged. However, the underlying reasons for this do not stand up to scrutiny; its more a case of in the kingdom of blind men, the one-eyed man is king! Prior to the crisis, Japan had endured years of deflation; a stimulus package designed to stimulate spending had seen the Bank of Japan adopt a near zero percent interest rate policy; the Japanese have a demographic time bomb ticking with an aging population and rising social security costs to name just a few factors.
Probably, the strength of the Yen can be traced back to the Bank of Japan’s zero percent interest rate. Many financial institutions took advantage of the policy to borrow cheaply and lend on the money at a premium. It meant that they could make loans at a very attractive rate of interest compared to local costs. Of course, when the global financial crisis was unleashed, many of these loans were repaid as financial institutions battened down the hatches. The loans had to be repaid in Yen which created a demand for the currency, pushing it higher and making it seem as good a safe haven currency as any in the storm. Before the crisis, the Euro was trading above the 170 Yen mark; at the low tide mark of the European sovereign debt crisis (and I realise I am being dangerously optimistic here…) it was trading at just 97 Yen.
Japan did not emerge from the global crisis unscathed and then had to deal with a devastating earthquake and tsunami. Japan has tried to ease its path through both man-made and natural disasters by pumping money into the economy to stimulate recovery and growth. Japan now has debts which amount to twice its GDP, by far the most indebted developed economy in the world. However, much of this debt is held domestically which means that Japan can continue to raise money on international markets at highly competitive rates.
Fitch’s rating agency has downgraded Japan’s credit rating by two points to A+ from AA stating "The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios, fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk."
Japan is trying to bring in reforms to its tax situation and social security costs, but a loss of confidence in the nation’s ability to meet its obligations would send borrowing cost soaring and put the Yen into freefall – which would, at least, help its exports.