Why is the Japanese Yen so strong? Natsumi Sato(2013.1)
Situation of Japanese yenTrade Cash Flow• Japan has a trade surplus and is exporting more than importing. This keeps the currency strong. • The strengthening currency could lower exports and increase imports in the long run. But in the short term it reinforces itself for example by reducing the supply of Yen required for imports.
Strong yen means in the world market• The Yen reached recently a 15-year high against the Dollar. Was this in line with expectations? What is happening and what is causing this? Here are the analysis and conclusions on why the Yen is so strong.
How can Japanese yen be strong?• The reason for this is the combination of the strengthening trend itself, the Japanese trade surplus, the low return on investments in the rest of the world, the expected monetary policy in the U.S. and the diversification of foreign reserves in other countries away from the U.S. Dollar and Euro. In an historic perspective, the strengthening of the Yen is nothing new and not unexpected.
How Japanese export suffers due to thestrong yen.• When comparing Japan with the U.S., one could be surprised by the strengthening of the Japanese Yen. The economic situation for Japan compared to the U.S. does not look that good and one may expect countries with a healthier economy to get a stronger currency, isn’t it?
The problem with domestic spending• The domestic interest rates in Japan are about the lowest in the world and not very attractive to park your money.• Japan has an aging population and this will temper the economic growth in Japan compared to the more vibrant demographics in the U.S. for example.
Effect on the strong yen.• The Yen / Dollar exchange rate has a fluctuating pattern with continuous lower tops; the current strengthening of the Yen since the last top in the chart is already taking place since mid 2007.• The overall trend during the last 20 years in clear; the Yen is getting stronger against the Dollar.
Future of Japanese yen• In the short term, reacting to a rise in risk aversion, flows into yen have been strong, pushing the currency up 2% in the month of May. Traders cut their short positions and added to longs, reducing the net short position to just US$-1.7 billion. Technical’s suggest ongoing downside risk; however a drop below 77 in USDJPY will aggravate intervention rhetoric. The near-term suggest a lower USDJPY; however Japanese fundamentals are weak, which should help USDJPY recover back up to 83.00 by year-end.
Conclusion• The Japanese real effective exchange rate depreciated 43% between the end of 2000 and the onset of the global financial crisis and then appreciated 30% over the next year and a half. Japanese firms complained that these exchange rate swings have had a devastating impact on profits, exports, and output.