By Scott Boyd
In response to a record high of 75.95 yen to the dollar, Japan’s Finance Minister Yoshihiko Noda promised “bold actions” noting that he “won’t rule out any possible options” in dealing with the yen’s appreciation. The strong language helped push the yen lower during Monday’s trading session but few believe Noda’s pledge will have a long-term effect.
In early April, one U.S. dollar could buy 85.25 yen. But currently, one dollar can barely buy 76 yen. This is an increase of nearly 12% for the yen in a matter of less than five months.
As one of the world’s largest exporters, Japan’s dependence on the U.S. market cannot be overstated. In 2010, Japan’s trade surplus with the U.S. extended to $60 billion on total exports to the U.S. of $120.3 billion. This represents an increase of 25.6% – or $24.5 billion – over the previous year with the U.S. market accounting for about 16% of Japan’s total exports.
The yen’s continued appreciation represents a threat to these sales. This threat is further amplified by the slowing U.S. economy and as consumers look for savings, a stronger yen makes Japan’s goods more expensive to the American market.
In recent weeks, officials have intervened to weaken the yen. The first salvo came when the Bank of Japan sold an estimated 4.5 trillion yen (US$57.8) into the currency markets. The intervention attempted to increase the supply of the currency in a bid to halt the yen’s advance.
It is demand for safe haven that is pushing the yen higher. In uncertain markets, the yen is one of the few opportunities available to investors in which to preserve capital. Stock markets have been very volatile with deep losses and the dollar and euro are both experiencing selling pressure. As a result, the yen – as well as the Swiss franc – is gaining in popularity.