The Rising Yen

The Yen-USD exchange rate was fixed at 360 from 1949 to 1971. In 1972, the Yen appreciated to 308. In 1973, the Yen was floated and from that time to mid-1985, it drifted with a downward bias (stronger Yen) to around 250 per USD. Then, it began a steep slide that saw the Yen touched 85 to a dollar in mid-1995. It recovered to about 140 in mid-1998 and then fluctuated between 100 and 135 for nearly a decade. From mid-2007, the Yen started its downward slide from about 122 to the present rate of about 77. Such is the strength of the Yen.

So, why is the Yen so strong? Well, it is because the Yen is a currency with net inflows. Japan exports more than it imports. This gives it a positive trade cash flow. The other component of the inflow is the investment cash flow. Huge Chinese purchase of Japanese debt has helped this account. The Chinese, in their effort to diversify their foreign reserve, bought 1.7 trillion of Yen in the first half of 2010. This is despite the Yen having the world’s lowest interest rate of 0.1 %.

Sentiment is also helped by the perception among market players that the US Federal Reserve may be more willing to conduct aggressive monetary easing than the Bank of Japan. Additionally, the repatriation of funds by Japanese investors has also helped the Yen. Domestic economic condition of deflation is making the Yen’s purchasing power rise thus rendering it a great store of value.

So, how are the Japanese companies coping with the strong Yen? It is reported that for every Yen rise against the dollar, Toyota’s operating income is slashed by 34 billion Yen. Many companies are shifting their production abroad – to countries where the taxes are lower, labour is cheaper and where the markets are growing. Also, Japanese companies have gone on an acquisition spree. The number of deals done has increased by 30% in the first 8 months of this year. In value terms, the acquisitions have more than doubled to $46.7 billion.