Tags: currency | japan | yen | dollar

Japan Is Sweating Bullets Over Its Currency

By    |   Monday, 30 Aug 2010 09:33 AM

Have you ever had something that just bugged you all the time and you just wished it would go away? I know I have. I’m sure you have too.


Japan has one of these situations brewing right now. It’s actually been a long-term issue, but there are times when it really comes to a head. Now is one of those times.

Ever since the 1970s, when the dollar free-floated against other currencies, it has basically headed lower. For example, in 1982, the yen was 277 to the dollar. So one dollar was worth 277 yen back then. Today, one dollar will get you only about 85 yen. Big difference!


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In just the last four months, the yen has risen almost 10 percent vs. the dollar! That’s bad news for the Japanese. Why?

They are huge exporters. Just think of products such as Toyota, Honda, and Suzuki cars, or Panasonic electronics.

Here’s where the problem comes in. Whenever Japan’s currency appears cheap (especially relative to the dollar and euro), then times are better for Japan because foreigners want to buy up Japan’s “cheap goods.”

However, when the yen strengthens significantly, it’s easier for foreigners to take their business elsewhere and buy their goods from a country that has a more favorable exchange rate. That way, their money goes further when they are buying these goods.

The yen is climbing, now, and it’s killing the profits of Japanese exporters such as Honda and Suzuki. In just the past two weeks, these companies’ executives have been extremely vocal — mainly about the yen exchange rate to the dollar, but also to the euro.

Japanese politicians are listening, and so is Japan’s central bank. In fact, the central bank has a meeting in the next two weeks (even though there is talk of an “emergency meeting” that could happen before then). Also, there is a Japanese Democratic Party election coming on Sept. 14 to see who will be that party’s next president (since the last one was forced to step down).

So you can bet that the Japanese probably will try to do something about the rise of their currency between now and then. What can they do? They can intervene in the currency market by going into the market and selling yen and buying up dollars and maybe even some euros.

They can’t continue to ignore the CEOs of all of these multinational corporations. They simply hold too much clout within the nation to be ignored. So the Japanese government and central bank will make a move soon. That’s for sure.

The problem with currency interventions is that they almost always are unsuccessful (even though they appear to be successful at the very moment of intervention).

The only central bank interventions I can recall that were ever successful required multiple central banks, including the U.S. Fed, intervening all at the same time.

It’s not likely that Japan will get the cooperation of the United States and Europe. So it probably will have to go it alone when it comes to intervention.

I figure we’ll see the Japanese central bank try to shake things up in the currency market, possibly within days but definitely within weeks before that election. That way it can save face with these CEOs that have such deep pockets and huge clout within Japan.

Once the intervention is over, I expect it to be a failure in the long run. Months after the intervention, Japan’s currency probably will be in the same spot as it is in now (or even stronger than it is now).

But do expect Japan at least to attempt to bring the yen off of its 15-year highs vs. the dollar very soon. Then by year’s end or at least by the end of the first quarter of 2011, I’d anticipate that the yen could reach its all-time high vs. the dollar of 79.75.

It’s going to be a huge adjustment period for Japan and its largest international corporations. I sure hope the Japanese have some good currency hedgers within these corporations.

I don’t think any of them are prepared for the road that lies ahead. That’s why I think that, ultimately, the Nikkei 225 stock index, which already at a 52-week low, easily could go to new 52-week lows in the weeks ahead.



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SeanHyman
Have you ever had something that just bugged you all the time and you just wished it would go away? I know I have. I m sure you have too. Japan has one of these situations brewing right now. It s actually been a long-term issue, but there are times when it really comes to...
currency,japan,yen,dollar
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2010-33-30
Monday, 30 Aug 2010 09:33 AM
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