September 14th, 2010
06:51 AM GMT
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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.



soundoff (22 Responses)
  1. bhatia

    and why swiss Franc is goinv so high against Euro?

    September 14, 2010 at 7:42 am |
  2. Amsterdam 1

    Because others countries are messier

    September 14, 2010 at 8:32 am |
  3. Motshwane

    I hope my country South Africa will learn from Japan and will consider our call for nationalising our countries resources instead of concentrating on enriching themselves and closed ones while living the poor sleeping on empty stomach

    September 14, 2010 at 9:31 am |
  4. Vivek Indian

    the Yen is still strong because, The rest of the World Believes in Japanese Products and its Quality.

    September 14, 2010 at 12:45 pm |
  5. Steve Thompson

    It is beyond me why the yen is so strong. Other than their very high savings rate, the Japanese economy is facing huge struggles. With their aging demographic and low immigration rate, deflation, a debt to GDP level of nearly 200% that is second highest in the world after Zimbabwe and dropping exports because of the strong yen, it is a wonder that their currency has gained against the US and Canadian dollars. But then again, the United States is facing a $13.4 trillion debt and annual deficits in the trillion dollar range.

    Here's an article discussing three of the issues facing the Japanese economy:

    http://viableopposition.blogspot.com/2010/08/japan-are-three-ds-going-to-kill-its.html

    September 14, 2010 at 12:48 pm |
  6. addis

    Ethiopia is coming as a power house in east Africa. It will be a shocker to the world.

    September 14, 2010 at 1:18 pm |
  7. Hershcel. P. Derp

    Maybe because their money is actually back up by REAL assets? Its not just printed like cheap paper and handed out to everyone?

    September 14, 2010 at 2:20 pm |
  8. CA

    That sounds some what Conflicting a messier Economy and unstable Govt , than to people take Janpan as a safe investment , I doubt that .... No one ever invest in a country of unstable political scene

    September 14, 2010 at 2:21 pm |
  9. TK

    I don't understand why investots chose Japan. There are a lot of issues that the nation is dealing with. I don't think we can say Japan is safe investment.

    September 14, 2010 at 3:23 pm |
  10. DW

    Its called currency trading!!!! Specifically against the dollar!!! Some of you should actually read before you comment!

    September 14, 2010 at 5:04 pm |
  11. Zim

    The Japanese have a central bank system, printing fiat currency just like everyone else.

    September 14, 2010 at 8:29 pm |
  12. james

    Answer is easy – take advantage of all of the faith that foreigners have in the currency and print money to dilute at the holder's expense. Pay off the debts with printed money.

    It's a very classic scam, which tends to drive up inflation as people lose faith the the currency, but as long as people have faith ... and they are foreign holder .... print print print...

    As the US is doing right now to China to some extent.

    September 15, 2010 at 12:56 am |
  13. Aznoor

    Japan like other Asian countries are conservative in their spending (exclude middle east).The current economic uncertainties are merely due to people confidence (that's what happening in US). Being the highly deposit region, it gains confidence from investors to invest in Asian assets, hence contribute to the strong exchange to the countries.. MYR, SGD and Renmimbi for instances.

    Totally disagree with Zim. Japan is not facing liquidity shortage hence there is no pressure to pint out money ...unlike US

    September 15, 2010 at 1:58 am |
  14. David Fu

    Market machanism will always find its way out and no worry, believe in John Maynard Keyes.

    September 15, 2010 at 8:41 am |
  15. Sadaqat Ali Khan

    The Japanese yen's rapid 15 year highs results in decreased international demand for Japanese goods creating further growth issues for the Japanese manufacturing industries.

    In May 2009, Moody's Investor Service downgraded Japan's sovereign debt by two notches from Aaa (Triple-A) to Aa2. Again in February 2010, Moody's threatened to change its outlook on Japan to negative unless the country got its debt under control. In its May downgrade, Moody's cited challenges that face the Japanese economy because of their increase in debt issuance to fund a massive $159 billion stimulus spending program to combat the recession of 2008 – 2009. Japan issued huge amounts of debt during the last 2 decades to combat deflationary pressures in their economy.

    Currency/Yen issue would continue unless above issues resolved.

    September 16, 2010 at 6:44 am |
  16. Jan

    Japan and Europe have (to) high currencies cause thei governments are beating inflation. USA and China are focusing on employability, i.e. export, and are pushing their currencies low.

    Thats why in the short run Japanese and European people think they are doing well, but all they do is putting their children in unemployment, that is Trichet does. America people are now for a while complaing about their worthless dollar, especially the elder epople who have workes a lifetime and they have seen their money going to air.

    In medium and longer run China and USA will do well I gues. And Europe and Japan are becoming to expensive and their export and employment will go down through the toilet.

    The global leaders and leaders of the central banks better let currencies let return to their true values and realize that they hurt main street everyday they do not intervene.

    September 16, 2010 at 12:28 pm |
  17. pong

    May be because some of Japan's loot during world war II have reached their destination, homeland, thats big cache. even though their economy is down but still they can trade. Because they have something to trade bigger than their cars and electronic goods. After fifty years that's after WWII, they can now dispose their loot, thats the start of 15 yr record high trading.

    September 20, 2010 at 6:55 am |
  18. nieldevi

    War Loot?
    Too many comic books, pong.

    September 23, 2010 at 10:59 am |
  19. MMWK

    Maybe, just maybe, its because Japan comes across as the more Civilized country as a whole, within Asia when compared to it's counterparts. (History excluded), But maybe also, it's more to do with how easy it is to switch your currency into Japanese Jen, and back again.... I'd personally like to buy CNY now, and then switch out at a moments notice to another currency when suited me, and not when suited the Government....but, c'est la vie...

    September 27, 2010 at 3:41 pm |
  20. InJapan

    An article with little info.
    The reason the Yen is strong right now is because all the the wealth that Japan either saved (previous high savings rate) or gained with the trade surpluses for years is now coming back into Japan. It flowed out for the last decade or so by the Japanese or the Currency "carry" traders who speculated / bought bonds or stocks in other countries. Now the wealth is flowing back into Japan and it has to come back in as Yen. The wealth is coming back because the carry trade is not as profitable because of similar interest / stock market performances with the Japanese and other countries and because of the increasing strength of the Yen. The other reason the wealth is flowing back is because of the Japanese are afraid of the markets outside of Japan and want their wealth back in Japan... of course in Yen. So the overall balance of supply / demand for the Yen has been heavily leaning toward demand since the economic crisis. As long as the Japanese run a trade surplus and as long as the Japanese want the security of keeping their wealth in Yen, the Yen will remain strong.
    If I was the Japanese Finance minister, I personally would print as much Yen as the markets will tolerate. As a trade surplus country it can afford to.

    September 28, 2010 at 7:28 am |
  21. pong

    War loot.... comic books? Try to read golden lily. There are other reference other that this. nieldevi.

    September 29, 2010 at 5:38 am |
  22. self emplyment ledger

    Thanks , I have recently been searching for information approximately this topic for a while and yours is the best I've came upon so far. But, what concerning the bottom line? Are you sure about the source?|What i do not realize is if truth be told how you're no longer actually a lot more well-appreciated than you may be now. You are so intelligent.

    June 27, 2012 at 7:17 pm |

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