By: Mike Campbell
Figures released yesterday, show that Japan is in a deflationary phase. For the sixth consecutive month, consumer prices have fallen in the world’s second largest economy. The latest decline, for August, is 2.4% year-on-year. Whilst this is undoubtedly welcome news for the Japanese consumer, it points to a worrying situation for the Japanese economy. The prices continue to fall, due to depressed demand in the domestic economy (linked to record post war unemployment levels and fears of those in work for their own futures).
The Bank of Japan is continuing with its policy of an ultra low interest rate which makes holding savings in a bank account unattractive (in a move, partially, to stimulate consumer spending). For its part, the Bank of Japan believes that deflationary pressure will continue until March 2011 and some analysts believe that the bank will be forced to concede that deflationary pressures will persist for another year beyond that.
When one considers the current strength of the Yen against other major currencies, Japan’s export partners, the situation looks unsustainable. As the Yen appreciates against other currencies, the cost of Japanese exports rise, making competing products more attractive.
The Yen broke through the 90 Yen to the US Dollar mark yesterday, closing at 89.52. It was also higher against the Euro and Sterling closing at 142.15 and 131.15 respectively. It is difficult to see how the strength of the Yen can be sustained over the longer term. The Japanese finance minister is on record saying that he can see no objection to a strong Yen, but then, as they say, a week is a long time in politics – even in Japan.
Yen Continues to Defy Gravity
DailyForex.com