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Rediff.com  » Business » Japanese yen: Under pressure to appreciate

Japanese yen: Under pressure to appreciate

June 30, 2009 12:42 IST

The Japanese yen is appreciating quite stridently in the last few days. One of the key reasons for the yen's recent strength is the uncollateralized overnight call rate, which the BOJ has decided to keep unchanged at around 0.1%, at a time of high-risk aversion amid global crisis.

Although lower rates usually weigh on the currency, because they erode the return on the asset denominated in that currency, the opposite is usually true in times of risk aversion. Whenever the investors get edgy, they tend to shed higher yielding investments funded in the lower yielding currencies.

While the economy is in a difficult situation, the cadence of worsening has become moderate. The Japanese government has raised its assessment of the economy for the first time in three years saying the pace of worsening is slowing as exports and industrial output are nearing bottom. Furthermore, Manufacturing Purchasing Managers Index gave reasons for sanguinity, rising to 41.4 from 33.8 last month.

PMI is the most important indicator of the economic status of a country because it is a reading of manufacturers anticipates, and the May numbers suggest manufacturers anticipate an increase in production in the month ahead. Meanwhile, industrial output surged the most in 56 years, in April 2009.

The Japanese yen became a star performer from the end of 2008, when the global financial catastrophe became significantly visible with the failure, conservator ship of several large United States-based financial firms. Beginning with failures of large financial institutions in the United States, headed by the giant Lehman Brothers, it rapidly evolved into a global crisis resulting in a number of European bank failures and declines in various stock indexes, and significant reductions in the market value of equities and commodities not just in US but practically everywhere. The currency was boosted further as US economic conditions deteriorate further, with the economy slumming by 6.3 per cent in Q4 2008.

The yen hit a historical high of 88 in January 2009, the highest level since the spring of 1995, when the yen had knocked a high of 80 against the dollar. However, the pendulum swung the other way in April 2009 when yen tumbled in value to 100 against the dollar, as the investor's turned their attention to the macro economic fundamentals of Japan, which were not in a good position as evident from the first quarter GDP figures of Japan, as a result of which yen lost its luster.  As the yen fell, Japanese exporters benefited, lifting up their shares. Exporters compose an estimated 60 per cent of the benchmark Nikkei index. Yen and the Nikkei have had a strong inverse link since about 2005.

Oflate, Japanese yen is experiencing an up trend, after the government raised its assessment of Japan's economy for the first time in three years. Though the economy shrank at a record 14.2 per cent annual pace in the first quarter, but this contraction is less then previously estimated. The BOJ said Japan's economy is likely to show clearer evidence of leveling out over time.

The government officials are increasingly hopeful that the economy will grow again in the April-June period as the government's stimulus steps take root and companies begin boosting production. The government also raised its view on bankruptcies and public investment as the rise in bankruptcies has moderated and its stimulus spending has boosted contracts for public works.

Given that the current rally in the Japanese currency is auguring on a seemingly strong footing, considering the optimism in the latest BOJ announcement, the underlying pressure on yen to appreciate may remain strong. This is more so the case given that the U.S. net international capital flows dropped to negative $53.2 billion in April. China reduced its holdings of U.S. Treasuries by $4.4 billion to $763.5 billion while Japan also reduced its holdings by $800 million to $685.0 billion. This reflects growing lack of confidence in the US assets and may keep the dollar depressed against yen.

Considering this, there is a very dim likelihood of the BOJ intervening in the forex markets to prevent yen from appreciating further. As the weak yen would not help the economy when there is no overseas demand. On the other hand intervention would lead to excess liquidity in the economy, which in turn will create the pressure on inflation.  In an economic sense if the intervention is not sterilized, buying dollars is equivalent to increasing the Japanese money supply, since the Finance Ministry purchases the dollars from Japanese exporters with yen, which then enters the Japanese money supply, in turn showing a road to inflation.

US Dollar- Japanese Yen

1/1/2009

90.787

2/1/2009

90.725

5/1/2009

92.08

6/1/2009

93.285

7/1/2009

93.792

8/1/2009

92.691

9/1/2009

91.239

12/1/2009

90.16

13/01/2009

89.19

14/01/2009

89.586

15/01/2009

89.31

16/01/2009

89.589

19/01/2009

90.7335

20/01/2009

90.387

21/01/2009

89.823

22/01/2009

88.17

23/01/2009

88.731

26/01/2009

89.2573

27/01/2009

89.075

28/01/2009

88.8055

29/01/2009

89.72

30/01/2009

89.775

2/2/2009

90.005

3/2/2009

89.846

4/2/2009

89.395

5/2/2009

89.67

6/2/2009

91.6

9/2/2009

91.845

10/2/2009

91.395

11/2/2009

90.67547

12/2/2009

90.56011

13/02/2009

90.875

16/02/2009

91.80693

17/02/2009

91.69

18/02/2009

92.41

19/02/2009

93.65

20/02/2009

94.275

23/02/2009

93.34

24/02/2009

94.725

25/02/2009

96.835

26/02/2009

97.262

27/02/2009

98.3535

2/3/2009

97.565

3/3/2009

97.165

4/3/2009

98.271

5/3/2009

99.315

6/3/2009

97.855

9/3/2009

98.285

10/3/2009

98.89

11/3/2009

98.65

12/3/2009

97.527

13/03/2009

97.635

16/03/2009

98.26599

17/03/2009

98.345

18/03/2009

98.564

19/03/2009

96.025

20/03/2009

94.745

23/03/2009

96.445

24/03/2009

97.305

25/03/2009

97.731

26/03/2009

97.76

27/03/2009

98.58

30/03/2009

97.293

31/03/2009

97.433

1/4/2009

99.15

2/4/2009

98.51

3/4/2009

99.395

6/4/2009

100.458

7/4/2009

101.055

8/4/2009

100.495

9/4/2009

100.4641

13/04/2009

100.225

14/04/2009

99.08141

15/04/2009

99.38288

16/04/2009

99.36

20/04/2009

99.236

21/04/2009

97.895

22/04/2009

98.665

23/04/2009

98.013

27/04/2009

96.78

28/04/2009

96.765

29/04/2009

96.435

30/04/2009

97.468

1/5/2009

98.713

4/5/2009

99.265

5/5/2009

98.985

6/5/2009

98.851

8/5/2009

99.111

9/5/2009

98.465

11/5/2009

98.745

12/5/2009

97.515

13/05/2009

96.13964

18/05/2009

95.01244

20/05/2009

96.102

21/05/2009

95.034

22/05/2009

94.45633

25/05/2009

94.78

26/05/2009

94.714

27/05/2009

94.905

28/05/2009

95.0375

29/05/2009

97

1/6/2009

95.32216

2/6/2009

96.345

3/6/2009

95.625

4/6/2009

96.025

5/6/2009

96.61118

8/6/2009

98.825

9/6/2009

98.07215

10/6/2009

97.28061

11/6/2009

98.1165

12/6/2009

97.84

15/06/2009

98.385

16/06/2009

98.0795

17/06/2009

96.58811

18/06/2009

96.36853

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