By: Dr. Mike Campbell
Just days after figures were released, showing that Japan had emerged from a nine month recession; the Bank of Japan has sounded a note of caution about the nation’s growth prospects. The Q3 GDP figure came in at a respectable (in the current context) 1.5% and are believed to have been boosted by reconstruction activities following March’s natural disaster.
The Bank is concerned that growth may be stymied by the continuing Eurozone sovereign debt crisis. This is for two main reasons; (i) business confidence in the region is being adversely affected by the crisis, dampening demand, (ii) the on-going crisis and high yields demanded on sovereign bond investments are continuing to exert a downwards pressure on the Euro against other major currencies, including the Yen.
The Bank of Japan recently intervened in the markets to devalue the Yen (by selling it). Initially, this caused a 5% devaluation against the US Dollar, with the Yen falling from about ¥75.8 to about ¥78.4. However, little has been done to calm market jitters that the US economy is slowing and that Europe will not suffer a further major recession on the back of its sovereign debt crisis with an implosion of the Euro (nobody ever said fears had to be rational). As a consequence, the Yen has strengthened as investors turn to it once more as a safe haven currency and it is trading at ¥76.8910 currently.
A strong Yen makes Japanese exports less competitive in importing markets. Japan is also suffering because of devastating floods in Thailand which have affected some of Japan’s overseas manufacturing, notably automobiles and certain electronic components, affecting the supply of components to Japan. The Bank may have to step up to the plate again and take further action to weaken the currency.