September 14th, 2010
06:51 AM GMT
A towering national debt, a revolving door of prime ministers and an export-driven economy limping slowly from its worst economic slump since World War II – Japan’s got it bad.
So why is the yen trading at 15-year record highs?
A number of factors have combined to pump the yen up to 83.36 per dollar on Tuesday, the highest since May 1995.
First, to set the scene: In June 2007, the yen was trading at 122.64 against the U.S. dollar – its highest level in five years. Then the U.S. subprime loan market imploded. Japanese who invested in other currencies with higher yields – known as “carry trades” – brought that cash back home as other currencies, particularly the dollar, was hit by the crisis.
The yen’s natural strength lies in the country’s trade surplus. Cars, electronic goods and other Japanese products sold abroad brings a healthy stream of yen back home. Add to that the influx of cash investors brought back to Japan as the global economy crashed, and the yen continued to strengthen.
Another factor: Countries and investors diversifying away from the dollar in the wake of the crisis were looking for a safe investment, and the yen was a popular choice. Most notably, Beijing has been snatching up a record number of Japanese government bonds instead of U.S. ones.
“That to me explains largely what is happening to the yen in the face of what is reasonably dark economic news and a difficult political situation,” said Benjamin Pedley, head of investment strategy in North Asia for HSBC Private Bank.
And that adds to the difficulties for Japan’s recovery – a strong yen cuts the profits of its products abroad.
The markets are waiting to see if the saber rattling among Japanese politicians on the skyrocketing yen will turn into a government intervention to lower the value of the currency. The government hasn’t taken such steps since 2004.
But Pedley doubts any intervention by the government will have any long-term effect on the strength of the yen. Trading partners in Europe and North America, on balance, would prefer a stronger yen. “The problem is, any intervention would be unilateral – they won’t have any cooperation,” Pedley said.
With the re-election of Naoto Kan as head of his party - and as Japanese prime minister - the markets are betting that the yen will remain high. The Tokyo markets closed before the vote, but hit a fresh 15-year high on the belief that Kan would survive the internal challenge from Ichiro Ozawa, who favored a strong intervention in the markets.
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