US troubles will keep yen high

Philip Salter
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THE next chapter in Japan’s economic disaster is being written. With US debt a concern, investors have been turning to the yen as an alternative “safe haven” currency. In response, the spectre of intervention has been raised again, but try as they might the authorities won’t buck the currency markets.

The export-focused Japanese authorities want a weak yen as they hope to export their way to recovery. The rhetoric of intervention has had its effect as investors moved out of yen yesterday in response to the news. However, Angus Campbell of London Capital Group says: “The yen’s strength is down to dollar weakness, so if the global economy continues to shows signs of slowing, the yen will probably be seen as more of a safe haven.”

Campbell thinks the more the yen rises, the more likely it is that the Bank of Japan will do something, but he says “they must feel like they are continually swimming against the tide, as it hasn’t done any good for the overall upward trend of the yen.” Similarly, Chris Beauchamp of IG Index says “dollar-yen continues to present a decent downtrend, as the currency pair has successfully shrugged off interventions time and again.” He continues: “The latest one, in mid-March, was as short-lived as it was impressive, showing that even the co-ordinated action of multiple central banks was insufficient to halt the US dollar’s fall against the yen.”

In fact, the recent economic history of Japan is one of woeful interventions. Ultra loose monetary policy in 1986 and 1987 – designed to bring down the yen’s rise – inflated a real estate and stock market bubble. In response to rising prices, the government upped rates in 1989 and 1990, thus precipitating a property and stock market collapse. Trillions of fiscal and monetary stimuli combined with billions of commercial and government debt purchases have failed to pull the economy out of its quagmire – instead locking Japan’s economy in its slump by inhibiting the liquidation of bad investments.

Until the US gets its act together, the yen will remain strong against the dollar. Beauchamp says “weaker US economic data raises the possibility, however unlikely it seems at the moment, of QE3, which would give further downward impetus.” Campbell agrees that QE3 is possible. Japan has given up that particular intervention – for now.