By: Dr. Mike Campbell
A friend of mine who works in the financial sector in Japan once sent me a postcard that started “Greetings from the land of the rising Yen”, whilst that was twenty years ago, it might as well have been yesterday.
The Japanese currency continues to defy logic, government desire and financial gravity and has been transported to fresh 15 year highs against the US Dollar. The Yen is currently trading at 83.5 Yen to the Dollar and the trajectory of the graph suggests that it will continue to sink.
Japan’s economic strength lies in its ability to export to the rest of the world. The USA is her largest trading partner followed by the EU and China. The Chinese government may have softened their unofficial policy of pegging the Chinese Yuan to the Dollar, but it is still trading within a narrow band against the Greenback.
In Europe, the Euro and Sterling have both strengthened a little against the Dollar but both currencies have weakened against the Yen over the last few months. What this means is that Japanese exports are now at their most expensive for the American market in 15 years. Now is not a good time to be pricing oneself out of the market place as the recovery picks up with the pace of a raging glacier.
Obviously, producers can cut prices, but there is a limit to this. Japan’s economic growth slowed in the last quarter and a high Yen could well force the economy back into recession.
The Japanese finance minister has dropped strong hints that the Bank of Japan and the government will intercede to devalue the Yen, but investors in currencies have ignored him. The time for hinting seems to be long past, but the question is how effective will intercession proove?