G20 Makes No Objection Against Yen

Japan has been in recession for the past three quarters and continues to suffer from price deflation despite a long-term near zero interest rate policy and numerous financial stimulus packages put forth by its government and the Bank of Japan. Part of Japan’s woes stem from the economic equivalent of the “any port in a storm” adage. In the teeth of the worst global financial crisis since the Great Depression, investors had sought somewhere to deposit their funds whilst riding the storm out. Japan was one of the countries of choice as a safe haven for investors and this caused the value of the Yen to appreciate against other major currencies. The Euro fell from a high of 170 Yen to a low value of 94.6 over the course of the crisis, in part, of course, the decline was fuelled by the European sovereign debt crisis.

Since mid-summer, the Yen has been softening – you might even say melting – against other major currencies. Together with renewed confidence in the long-term viability in the Euro after the ECB finally managed to draw a line under the worst of the crisis, this has seen the Euro strengthen to 125.24 Yen. As a consequence of the weakening Yen, Japanese exports are becoming cheaper in importing markets, boosting their competitivity and meaning that when foreign currency earnings are repatriated to Japan, they buy more Yen.

The G20 met in Moscow last week and there had been concern that Japan could have faced censure for allowing the Yen to fall as quickly as it has. In the event, the meeting focussed on ensuring that multi-national corporations pay more tax. Japan’s Nikkei index was buoyed by the passive acceptance of the nation’s policies and rose 2.1% on the strength of the news. The Japanese have been at pains to explain that their focus is on stimulating domestic demand by ending deflation and on kick-starting their economy; the Bank of Japan has no specific exchange rate goals and therefore the decline in the value of the Yen is due to economic factors and market forces.