By: Dr. Mike Campbell
In what would have been one of the week’s major news items, had it not been for developments in Greece, the Bank of Japan has interceded in the foreign exchange markets to weaken the Yen.
The Yen has hit fresh post World War II record highs against the US Dollar and the strength of the currency has clearly had an impact on the profitability of major Japanese businesses. In the aftermath of the global financial crisis, the Yen has been seen as a safe have currency and this has been responsible for a 17% appreciation against the Dollar over the past two years and a 39% since the onset of the crisis in June 2007 when a Dollar bought 123.63.
The high value of the Yen has hit the profits of the likes of Toshiba, Panasonic and Honda which have all reported lower second quarter profits. Naturally, the disruption caused by the natural disaster which hit Japan in March will also have depressed profits during the second quarter of reporting. Toshiba’s profits fell by 19%; Honda suffered a 55% drop in net income and Panasonic reported a loss of ¥106 billion.
What's Next for the Yen?
The Bank of Japan’s move pushed the Dollar up to 79.33 to the Yen, but over the next two days, the rate recovered to 78.1050 as investors bet that the Yen would rise – which, of course, it did. The Bank of Japan’s earlier interventions in the market also had limited success, with the lower Yen value only surviving for a short period of time before appreciating above the starting point.
The climate for weakening the Yen could hardly have been worse. Clearly, BOJ waited until the Euro deal had been struck and markets had reacted favourably, only to be hit with disappointing US factory data and the thunderbolt of the Greek referendum which could yet scupper the deal struck by EU nations and plunge the markets and foreign exchanges into a further bout of doubt and confusion.