Japan Intercedes In The Currency Markets

By: Dr. Mike Campbell

Just one day after he survived a leadership battle for the control of the Democratic Party of Japan and with it, the premiership, Nato Kan’s government has taken action to cool the rising Yen. It had been anticipated that Kan’s rival, Mr Ichiro Ozawa, would have supported a more interventionist policy to depreciate the Yen. As a result, when Mr Kan was returned to power, the Yen climbed to a fresh 15 year high against the Dollar, trading fractionally below the 83 Yen mark, before recovering to close just above 83 Yen. Obviously, this was the mark in the sand for the Kan government.

The fact that the Yen is at a 15 year high means that Japanese exports to the US (unless discounted) have not been more expensive for 15 years. In times of global economic stress, Japan can ill afford to be priced out of its major export market. Today, the Bank of Japan has moved into the markets to sell Yen and buy Dollars. In essence, the Japanese government is speculating against its own currency. The move has forced the Dollar well up above the 85 Yen mark (85.265 as I write this) and has seen a boost on the Japanese stock exchange which has pushed leading shares higher by 3% or so.

It remains to be seen how the markets will react to the Bank of Japan’s move. The Japanese government had been looking to build a governmental consensus to allow the Yen to depreciate, but the Americans were unwilling to take part in this move. Dearer Japanese exports may give a boost to American domestic producers and the US economy is widely perceived to be slowing down. Increased demand for domestic products could be enough to stimulate employment prospects within the US economy – just as the US moves towards mid-term elections.