By: Dr. Mike Campbell
It seems that everything is conspiring against the Japanese, especially in the aftermath of the most devastating earthquake and tsunami which has cost thousands of lives and for which the costs of rebuilding run into the hundreds of billions of dollars. Estimates suggest that the total cost to Japan may knock one percent of the GDP. As if this wasn’t enough, a nuclear power plant has been damaged in the disaster and it remains unclear as to the real extent of the threat to the environment and to the remaining skeleton workforce from the radioactivity. Explosions have damaged 3 reactor houses and although the reactors shutdown safely, terminating the nuclear chain reaction, the cooling supply to the reactors seems to be inadequate and hence there is a risk of contamination.
Perversely, the value of the Yen has risen on Forex markets. Whilst this appreciation runs counter to all the insights of fundamental analysis, it has been attributed to the “repatriation” of funds from abroad which has led to an increased demand for the currency as Japanese assets denoted in foreign currencies are converted to Yen. At one point, the Yen climbed to 76.25 to the Dollar. The Nikkei fell a further 1.4% to close at 8962 as volatility continues to grip the markets.
The trouble of a strong Yen for the Japanese economy is that it puts pressure on Japanese exports, making them more expensive in Japan’s markets abroad – worsening an already bad situation. As the cash flow into Japan abates, it is likely that the Yen appreciation will reverse and a more “fundamentally” sound value will become established.