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Source: www.asiaecon.org |

JAPAN TRIES TO CONTROL ITS SURGING CURRENCY


Although Japan's economy is shrinking amid the global economic conditions, the Japanese yen continues to surge against foreign currencies. This has led to a falling trade surplus, leaving many industries in Japan financially impaired.


Although Japan’s economy is shrinking amid the global economic conditions, the Japanese yen continues to surge against foreign currencies. This has led to a falling trade surplus, leaving many industries in Japan financially impaired. 

Since the end of last summer, the yen has continued to strengthen against foreign currencies. It is currently up 65 percent against the dollar since August, 46.7 percent against the Euro, and 23.2 percent against the dollar, according to the Economist.

The strength of the yen has made Japan’s imports cheaper. Considering that Japan is the seventh largest importer in the world, a strong yen helped increase imports by 8.8 percent last year. The problem is that the strength of the currency has also made its exports less attractive in the world market, leading to an 80 percent decrease in the total trade surplus. Coupled with the global decreasing demand for goods, rising prices for those goods has only hurt many of Japan’s industries.

Nissan, one of Japan’s largest auto makers, had announced last week that it would be cutting 20,000 jobs due financial losses, specifically citing “the negative impact of the strong yen” as one of the reasons for the $904 million net loss that it incurred last quarter. Toyota Motor Corp. and Sony Corp. have also announced that they will be reducing their work force.

Many Japanese businesses have been urging the government to weaken its currency for fear that they will continue to suffer from falling exports. Finance Minister Shoichi Nakagawa indicated earlier this week that the government will intervene only if the yen continues to surge, but that it would not interfere otherwise for fear that government action could magnify any re-stabilization. During a press conference, Nakagawa commented on the situation, saying “be it foreign exchange, stocks or any other markets, rapid swings are damaging to Japan’s economy”. If the Japanese government does decide to take action, It would be the first time since 2004 that they intervened with the nation’s currency.

The growth of the yen has been described as a bubble that will eventually pop. One reason, according to numerous analysts, is that the yen is recovering from a long period of being undervalued. For years, investors have exploited the stable yet low interest rates in Japan’s currency by borrowing yen to pay for higher yielding investments in other countries. This has resulted in a build-up of the value of the yen, but as investors abroad liquidate their investments and foreign interest rates continue to dwindle, the diminishing reliance on the yen should devalue it in global markets. 

Another reason why the yen bubble should pop is that the Bank of Japan (BOJ) is planning on spending ¥1.5 trillion ($11 billion) to buy shares of companies that are in danger of failing. Considering that Japan has a nominal inflation rate, the BOJ has the latitude to use monetary policy to alleviate the financial pressures that many of Japan’s industries are experiencing. The monetary plan should also help devalue the yen.

Many analysts, such as London-based financial center Hans-Guenter Redeker, have already concluded the inevitable decline of the yen, stating that “the trigger of the anticipated yen decline may well be related to Japan being at risk of moving into a depression”.  What seems to be the most important factor is making sure that the currency is able to stabilize without drastic swings in either direction. A drastic upswing could further damage domestic markets, while drastic downswings could equally damage other industries within Japan’s markets.


Source: AsiaEcon.org
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Source: www.asiaecon.org |


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