The strength of the Yen over the course of the global financial crisis has had little to do with Japanese economic fundamentals. Rather, the Yen was perceived to be a safe haven currency in troubled times by foreign currency investors which pushed up its value. The trend was started by the need for many investors to repay cheap Yen loans when the crisis started which increased demand for the Yen and led its appreciation.
Whilst a strong Yen means that raw material imports (mainly in US Dollars) are cheaper, the opposite side of the coin is that Japanese exports are less competitive in importing markets, further weakening demand in an already sluggish global economy. Forex investors who turned to the Yen early have seen substantial gains.
The new director of the Bank of Japan (BOJ) is in agreement with the government about the use of stimulus measures to boost the Japanese economy, stimulate domestic demand and create inflation in the economy to put an end to years of deflationary pressure. The aim of these policies is not to weaken the Yen, but that is a likely consequence.
The latest stimulus package sees the BOJ pledging to purchase a further $520 billion of government bonds per year (10% of the nation’s GDP) and will also purchase riskier assets. This move should increase liquidity in the economy.
The move has pushed the Yen towards Dollar lows not seen since 2008 and it seems likely that it will soon breach the 100 Yen mark. It is likely that investors will want to secure their gains and sell Yen which will add momentum to the downturn. In turn, this could produce a buying pattern in other safe haven currencies such as the Australian Dollar as investors seek the next place to park their cash.
Yen Continues To Depreciate
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.