Will strengthening Yen damage Japan?
Monday 13th September 2010
There has been a lot of speculation that the yen will pass its post-war high of 79.75 (to the dollar) last reached in April 1995.
As a result, lawmakers from Japan's ruling party are putting pressure on Prime Minister Naoto Kan to consider intervening directly in the currency markets.
Concerns are mounting over the strength of the yen and its impact on exporting industries.
John Stewart, Head of Japanese Equities and manager of the Gartmore Japan Absolute Return Fund, said: "The recent strength of the yen has been primarily driven by increased risk aversion globally, and more recently in anticipation of a resumption of quantitative easing by the Federal Reserve."
Stewart believes that intervention by the Bank of Japan to weaken the yen is unlikely in the near term given the corporate sector remains in relatively good shape, as evidenced by the recent earnings reporting season, and the domestic economy is yet to show any real signs of stress.
"Despite the recent yen strength, the recent earnings season saw a raft of earnings upgrades from Japanese companies and sell-side analysts as companies coped better than expected with the macro backdrop," he said.
Furthermore, most intervention in the past has been conducted with either the explicit or implicit approval of other central banks - something which is unlikely to be forthcoming in the current environment. It is also not clear that the strong yen is at the heart of the problem for Japan.
Rather than currency intervention, there is a growing political consensus - across party lines - that the Bank of Japan should ease policy to help overcome the deflationary pressures in the economy. While this pressure may challenge the independence of the central bank - something the BOJ will resist, there could be moves in this direction if the economic situation deteriorates further.
This would also likely lead to a weakening of the yen, but would have broader economic benefits.
On one level, the rally in the yen is ironic given Japan's sovereign debt problems. It was only a few months ago when the perceived wisdom was that the yen would weaken as investors fled Japanese assets fearing the country's fiscal position was unsustainable.
As such, recent concerns over the yen may just be the latest in a series of macro-led concerns that have been afflicting the Japanese equity market recently. If the yen strength were to persist, however, rather than the corporate sector being the main casualty, it would likely be the domestic economy which would suffer the most in the longer term, as companies continued to shift production facilities offshore causing a further "hollowing-out" of the domestic economy.
The current reality, however, is that investor expectations are very low, and for the moment at least, companies are coping better than expected in the current uncertain macro environment - the yen's strength in particular.
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