On Thursday, officials with the Japanese government met with officials at the Bank of Japan to discuss the recent record appreciation of the Japanese yen.
Since the beginning of July, the yen has been steadily appreciating, particularly against the U.S. dollar.
During the first week of August, the Bank of Japan intervened in an effort to stop the trend. That led to a sharp sell-off in the yen, but it was only short-lived. Within days, the yen began to appreciate again.
Japanese officials may be pondering further intervention after the release of export data for the month of July. According to Bloomberg, Japanese exports declined 3.3% year over year. Economists were anticipating only a 2.6% decline.
The Japanese economy is dominated by exports. Therefore, a strong yen may be prohibitive to Japanese economic growth. As the yen appreciates, Japanese goods may appear more expensive and therefore less attractive to foreign consumers.
Imported goods may also appear more attractive to Japanese consumers, creating a trade deficit in Japan and therefore further stymieing economic expansion.
Following the tsunami in Japan last March, the yen rallied sharply. Although that may have seemed counter-intuitive at first, many insurance agencies were liquidating their investments in an effort to raise capital. As a consequence, the demand for yen increased as these firms needed to pay for claims.
In a coordinated response, on March 18, the Federal Reserve purchased $1 billion. The central banks of other G7 nations also participated, working to drive the value of the yen lower.
Unfortunately for Japan, the world has changed since March.
In recent weeks, many central banks have taken aggressive actions to control the values of their own currencies. The Swiss National Bank, having seen the value of the franc rapidly appreciate, has intervened repeatedly, and has even floated the idea of pegging its currency to the euro to prevent further appreciation.
Japanese economist Matsuoka stated that the full effects of currency appreciation take as much as six months to be fully felt. If Matsuoka’s assessment is correct, Japan could be in for more problems going forward.
As Japan recently entered yet another recession, the country made need its export sector to help it recover. Of course, one might be inclined to wonder if Japan is pursuing the best policy. As the economies of North America and Europe appear to be contracting, which countries is Japan attempting to export to?
If the Bank of Japan continues to follow its precedent of supporting exporters though, the yen may depreciate from here. Yet, if other central bankers (who themselves may be pursuing weak currencies) have their say, the Bank of Japan may be unable to really weaken the yen.
