March 17th, 2011
07:04 AM GMT
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(CNN) – A spiraling crisis caused by the earthquake, tsunami and nuclear drama has turned into a financial crisis for the world’s third largest economy.

In a few short hours, the yen smashed through the 80 yen-to-the-dollar barrier, peaking at 76.25 yen. That was the highest level the currency has hit since World War II.

The health of Japan’s economy is based heavily on exports. A stronger yen can wipe billions of dollars off corporate balance sheets. For example, Toyota loses 30 billion yen, roughly $380 million, for each uptick of the yen against the dollar.

Analysts say timing played a big role in the sudden surge. Trade is typically thin around the end of the U.S. trading day and before Asian markets open. The yen, considered a safe bet in times of crises, had been gradually strengthening over several trading sessions. With risk adverse investors pushing the currency higher, it broke through 80 yen per dollar.

That triggered a flood of automatic buy orders, as traders “who bet on the higher-dollar yen were forced to cut their positions,” says JP Morgan’s Tohru Sasaki. At the same time, the thin trading volumes exaggerated the overall impact.

Also, there is a sense that soon major Japanese corporations will need to bring back boatloads of yen from foreign markets to pay for damages done by the earthquake and tsunami – a move that would further strengthen the yen.

In September, Japan ruffled feathers when Tokyo intervened in currency markets, selling more than 2 trillion yen to weaken the currency. Nomura currency analyst Yunosuke Ikeda believes such action may happen again. "The possibility of intervention is fairly high if the automatic rebound does not break 80," he says.

Sasaki believes that Japan’s government will be put off by the cost of such an intervention. Already highly in debt, the Japanese government has to finance the recovery effort; it won’t want to pay weaken the yen as well.

Currency markets have calmed down in the last few hours, with the yen now trading closer to 79. But this is still record territory for the yen and the kind of strength that weighs heavily on the country’s fragile economy.

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Filed under: Japan

soundoff (18 Responses)
  1. M

    This takes like years of college to understand, right?

    March 17, 2011 at 7:33 am |
  2. MM

    Not really. No college education required. Simple common sense! Japan heavily relies on foreign oil and pays for it by exporting electronics and cars. Since Japanese quality is strong, its gadgets and cars last longer than the oil it imports and hence in the end, they have to pay more for the oil than what they get for their electronics and cars. Hence they intentionally weaken the yen. Got it Mr. M?

    March 17, 2011 at 11:03 am |
  3. ww123

    Simple math really. in addition to MM's comments, it really depends on the dollar amount in circulation, personal debt within Japan and government debt issued (bonds, T-bills etc)

    March 17, 2011 at 12:10 pm |
  4. Alan Greenspam

    Forget the trade stuff, it has basically no impact on exchange rates. Look at the interest rate differential long term japanese bonds yield (even) lower interest rates than long term US bonds, so appreciation yen unavoidable. Don't need years of overpriced college education to understand what is going on here.

    March 17, 2011 at 1:21 pm |
  5. jeremy

    I never comment on forums but that is just such an incorrect explanation my head hurts. Perhaps it is a troll.

    Explanation in a nutshell.

    1. Japan sells the US a car the US gives japan a dollar.

    2. Japanese companies have many US dollars sitting around.

    3. Japan needs to pay for earthquake reconstruction.

    4. Japanese companies sell dollars to buy yen because they need to spend money in Japan.

    5. Buying yen increases its relative value to the dollar and drives its price up. Hence the earthquake results in a higher yen.

    March 17, 2011 at 1:22 pm |
  6. Dummy

    If MM is so "bright" why does his answer explain how they weaken the Yen when the article clearly is discussing why the Yen is so STRONG against US$ ?? Simple Math...simple confusion..

    March 17, 2011 at 1:23 pm |
  7. gatorgator

    Simple. Japan is the nation who has the most US dollar or foreign money in the world.

    If Japan sell all of them, world will collapse.

    US and international society support Japan this time, so Japan will not sell though...

    March 17, 2011 at 1:32 pm |
  8. Dummy

    ww123 your answer is the exact reason why there is such blind confusion in all areas of oil prices currency etc, manipulated by "supposed" knowledgeable "analysts. You maintain that personal debt, currency in circulation etc affect these things. Well your credibility is as bad as your argument. You think that somehow those factors are weighed, (accurately) every hour, day etc and cause the currency to change. Please explain how it is even remotely possible to attempt to determine those factors in any way, constantly accurately and repeatedly, to determine how they would change so dramatically (hourly and daily) to be able to be understood and acted upon by anyone, other than "analysts" who put their own particular slant on information which they constantly change as hey are proved wrong day by day, hence the ridiculous swings in all these prices and values. Not brain surgery or rocket science, just irresponsible betting by the privileged few who are able to have such an impact on prices as the masses follow blindly like sheep.

    March 17, 2011 at 1:34 pm |
  9. blabla

    MM actually Japan rarely intervenes in their currency. They did it last fall but only once and it had almost no effect...on the other hand China and South Korea do it constantly...and even the US does it on a more massive scale with our quantitative easing

    March 17, 2011 at 1:54 pm |
  10. Chandra

    I think, there could be possible for Government reserves or big brands still keep going...

    March 17, 2011 at 2:29 pm |
  11. Si

    reason suggested in story. Corporates and govt need lots of funds to rebuild and they will have to sell foreign denominated assets to raise the funds. Repatriation is sending the yen higher. The same thing happened after the Kobe quake in 95. Yen strength was short-lived then however this time round the dollar is much weaker.

    March 17, 2011 at 3:32 pm |
  12. V

    @MM, what s the purpose of weakening the yen , if they needed more money for electronics exports?

    March 17, 2011 at 3:35 pm |
  13. kac

    Not really, MM. They want the Yen to retain it's value because if the Yen strengthens the price of their exports will increase. Hence their companies losing money when their products become more valuable. Which is why their government would risk increasing their level of debt, in order to maintain their GDP (which is mostly exports).

    March 17, 2011 at 5:56 pm |
  14. Maung oo

    Japanese people can control and try for the best to their goal.

    March 17, 2011 at 9:18 pm |
  15. davebeet

    prices are back to pre tsunami levels. the change in price was nothing more than speculation and then profit taking. yes money will come into japan but when a trillion dollars a day is traded in forex, red cross isnt going to make much of a difference

    March 18, 2011 at 3:10 am |
  16. Shaun

    Here are the reasons in summary

    1. Repatriation of foreign assets
    2. Speculation
    3. Automatic buy orders
    4. USD weakness

    March 18, 2011 at 4:21 am |
  17. MMM

    MM is way off.
    The Jpn gov't has been trying everything to weaken the yen and nothing is working. They can't weaken the yen.

    December 22, 2011 at 8:06 pm |
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