the current situation
As I’m writing this during afternoon trading on Monday in Tokyo, the yen exchange rate is at US$1 = ¥ 76.8. That is down a bit from the high of US$1 = ¥ 76.5 the Japanese currency achieved last week. But it’s still about 1% stronger against the greenback than when Tokyo intervened in the currency markets on August 4th trying to stem the yen’s rise against the dollar.
Notably, in contrast to the coordinated intervention by a group of major industrial countries that occurred after the tragic earthquake/tsunamis of last March, Japan acted alone this time. The show of solidarity in March was enough to buy the yen a month of relative weakness; the difference of opinion implied in last week’s solitary move meant the Japanese currency gained a mere day of respite.
Two of them:
1. Countries, either alone or in groups, have far less firepower in currency markets than the big international banks. Add to this the fact that governments typically want to defend politically expedient but economically inappropriate currency levels, and it should come as no surprise that countries stand no chance at all to impose their will on today’s currency markets.
2. A rising currency acts to slow down economic activity, much in the way an increase in interest rates does. But it also rearranges growth–away from export-oriented industries and toward domestic ones. It also reduces the local currency price of imported raw materials.
what about Japan today?
I think it’s important to distinguish between the Japanese economy and the Japanese stock market.
In the case of the former, the most pressing current need is to rebuild the Fukushima area after March’s devastation. The increased government spending that will make up part of that effort will tend to lift GDP growth, negating at least a portion of the high-yen pressure on economic expansion. To the degree that local companies use dollar-denominated materials in their rebuilding, their costs will be lower, their profits higher, than they would be in a weak-yen situation. Therefore, yen strength probably won’t be a significant negative for Japan’s economy–and may even be a mild positive. Today’s announcement in Tokyo of better than expected 2Q11 GDP illustrates this point. Economic news is likely to continue to be surprisingly positive over at least the coming 12 months.
The Japanese stock market, on the other hand, is in many ways a monument to Japan’s weak-yen, export-oriented economy past. In fact, if you were to examine the sectoral structure of the Nikkei without knowing it to be the Tokyo index, you’d guess it to be the benchmark for an emerging economy, not a developed one. Because this is so, although there will be pockets of strength among Japanese stocks, the index will likely be held back considerably by its high weak-yen component.