PITY the poor Japanese policymakers. As global economic growth slows, the yen continues to appreciate against all reason, hurting the export driven economy that’s already been battered by natural disaster and chronic deflation. At the end of last week dollar-yen hit a fresh record low of ¥75.95 as the trend intensified. The strength in the yen is no way a reflection of positive investor sentiment towards the Japanese economy. Rather it is simply a function of the unwinding of the risk trade, much of which is financed with low interest rate yen loans.
On Monday, Japanese finance minister Yoshihiko Noda warned that the government might once again step into the currency market to weaken the yen. Speaking to reporters Noda stated: “I have become more concerned about the worsening of the yen’s one-sided movements. I will take bold actions if necessary and won’t rule out any possible options.”
The comments by Noda are a clear sign of the frustration amongst Japanese fiscal officials as they face the conundrum of an ever-strengthening currency amidst rapidly deteriorating economic conditions. Japan’s export driven economy is trapped in a horrible cycle, as its currency strengthens at the worst possible time, just as global economic demand is beginning to slow. This leaves Japanese officials with no choice but to intervene in the market, even if their policy actions prove to be futile over the long run. For the time being the goal of Japanese authorities may be to simply slow the rate of appreciation rather than reverse the overall trend. If dollar-yen continues to drift towards the ¥75.00 level, they are likely to make their stand sooner rather than later.
In the meantime yen bulls will no doubt try to probe the ¥75.00 barrier, especially if economic data in the G10 deteriorates further. On Friday, Fed chairman Ben Bernanke will make his statement from Jackson Hole. If he hints that the Fed may ease further in order to combat the deceleration in growth, the greenback could sell off into the weekend and possibly push dollar-yen to the key ¥75.00 figure.