By: Mike Campbell
The world’s second largest economy is powered by exports to the rest of the world. When the misery of recession settled on the global economy, it tended to hit exporters worse than home-based manufacturers. For the Japanese, there is also the complication stemming from their long-running zero interest rate policy to be added to this.
The zero interest rate policy led to many overseas financial institutions borrowing from Japanese banks to take advantage of extremely cheap money. It could be lent to their customers at a higher rate. When the global recession hit, the Yen was weak compared to other major currencies. Financial institutions needed to close their positions (in Yen) with Japanese banks and as a consequence, the value of the Yen rose against these other currencies. For example, the Yen was trading just below the 180 mark against the Euro as the storm clouds of recession gathered. At the height of the storm, the Yen had risen to above the 114 mark to the European currency – a gain of 58%.
Against this background, the new Japanese finance minister, Hirohisa Fujii, indicated his belief that currency intervention was not needed if the Yen moved gradually against other currencies; indeed, he saw merit in a strong Yen. With Japanese unemployment at a record high and the economy deep in recession, it is hard to see the logic in this position.
The US is Japan’s largest trading partner. The value of the Dollar against the Yen has declined by 6.7% since June, effectively making Japanese imports to the US more expensive and therefore less competitive.
In trading yesterday, the Yen was down slightly against all other major currencies. In the final analysis, it will be the world’s FOREX markets that have the say on the value of the Japanese currency.