VALUE OF THE YEN: FLUCTUATIONS, STRONG YEN, HOLLOWING OUT OF THE ECONOMY AND THE TSUNAMI

YEN FLUCTUATIONS

The fate of Japanese economy if often tied to the strength or the weakness of the yen. The yen reached a record high of against the dollar in April 1995 when it reached 79 yen to the dollar. In July 1998 it reached a record low of 142 to the dollar.

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back of new 1,000 yen banknote

When the value of yen is high (around 75 to 95 yen per dollar), Japanese goods become more expensive overseas and less people buy them, and foreign goods become cheaper in Japan and people buy these goods instead of Japanese products. These forces bring the trade surplus down and cause the value of the yen to decrease.

When the value of yen is low (around 105 to 140 yen per dollar), Japanese goods become cheaper overseas and more people buy them. Also, foreign goods become more expensive in Japan and more people buy Japanese goods instead of foreign products. These forces increase the trade surplus and cause the value of the yen to rise.

In the mid 1970s when the dollar was worth 240 yen, American tourists could travel cheaply in Japan and Japanese products were cheap. In the late 1980s and early 1990s when the dollar was worth 80 yen, the cost of living for Americans in Japan was almost catastrophically high but American companies were able to make inroads in the Japanese economy because American products were cheap in Japan.

A strengthening of the yen affects not only trade with the United States it also affects trade with other countries because many of these transactions are done in dollars. Japan's trade surplus with the rest of the world creates a demand for yen, needed to purchase goods in Japan, which cause the value of he currency to rise.

Eisuke Sakakibara, a deputy finance minister, became known as Mr. Yen because his bold pronouncements were enough to cause major movements in the currency markets. He took his position in 1995 and immediately set about making statements and taking action to lower the value of the yen and help Japan's economy.

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front of old 5,000 yen banknote

Yen Carry Trade

In the early and mid 2000s, foreign investors took advantage of Japan’s low interest rates and took out yen loans for next to nothing and used that money to invest in other currencies, stocks or other investments globally, reaping profits with little cost and in the process generating investments in Japanese stocks and driving down the value of the yen.

The tactic, known as the yen carry trade, emerged in the early 2000s when the Bank of Japan continued keep interest rates low while other banks, beginning in earnest in 2004, started to raise rates, creating incentives to borrow money in Japan and invest it in other countries where returns were higher. Much of the trade was carried out by hedge funds.

No one knows the size of the yen carry trade but some in 2008 estimated it be worth at least $200 billion. Some said it was as high as $1 trillion. The credit bubble caused by sharp deprecation of the yen raised concerns of the destabilization of world financial markets if the bubble burst in an untimely way.

The yen carry trade lost its appeal in 2007 when the value of the yen shot up against the dollar and worries began over the fallout of the subprime mortgage crisis. One analyst told the New York Times, “If you’re investing overseas and the yen starts to go against you, or what you’re investing in goes against you, then you start to sell that and maybe the yen gets strong---that panics people into covering.” Most economists were happy to see the yen carry trade curtailed as it encouraged speculators and created instability.

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front of new 10,000 yen banknote

Strong Yen After the Lehman Brother Collapse

The yen continued to strengthen, falling below ¥85 to the dollar in August 2010 to ¥84.72, and reaching a 15-year low in September, falling below ¥83 to ¥82.87. The strong yen continued to be seen as primarily a negative thing and there were calls for the Bank of Japan and the government to do something to reverse the trend.

Conventional thinking had always been that the value of a currency rises when the a country’s economy is strong and declines when the economy is weak. So why has the yen appreciated when Japan’s economy has been far for robust. Osaka University professor Yoshiyasu Ono, an advisor to Prime Minister Naoto Kan, thinks this has occurred as result of improved productivity by Japanese economies.

Junuchi Maruyama wrote in the Yomiuri Shimbun , “When the nation’s exports slow due to a rise in the yen, firms try to improve productivity by cutting production costs and improving competitiveness in the global market. As a result exports do not decline significantly. Instead, imports fall as domestic companies cut jobs to streamline business...The drop in imports is due to a decline in domestic demand. When imports is due to a decline in domestic demand. When imports decline while exports do not, the nations current account surplus will grow, prompting further appreciation of the yen.”

“One believes a vicious cycle occurs, with the yen’s rise causing layoffs that prompt domestic demand to fall, bringing about a further appreciation of yen. Conversely, improving the job market and boosting domestic demand will efficiently break this cycle and stem the rise in the yen. The high value of the yen also has its roots in the economic probes in the United States and he. Major investors consider the yen to be a safer investment than the dollar or the euro.

“Even though Japan’s economy is no great shakes,” Maruyama wrote, investors “purchase the yen because they believe Japan’s currency does not violently fluctuate and its exchange risks are easy to manage compared with the those of the greenback and euro, whose value may suddenly plunge at any time.”

Why is the Yen a Safe Haven When Japan Has Such a Huge Debt

William Pesek of Bloomberg wrote: “As havens go, Japan sure is an odd case. You would think that having the developed world’s largest public debt, an aging and shrinking population, deflation, few natural resources and the ever-present risk of a giant earthquake might give investors pause. Since the global crash of 2008, though, they can’t get enough of the place. As a recession takes hold in Europe and the U.S. limps along, demand for yen assets has exploded. This is giving Finance Minister Jun Azumi and Bank of Japan Governor Masaaki Shirakawa fits as they confront pressure to halt the yen’s 33 percent surge since the collapse of Lehman Brothers Holdings Inc. [Source: William Pesek, Bloomberg, July 30, 2012]

“The yen is in vogue because the dollar and euro look uglier The trouble is, where? Probably not the euro or even the U.S. dollar. Maybe commodity currencies such as Australia’s or Canada’s, though their dependence on China and its slowing economy is unnerving. One could opt for gold, but at more than $1,600 an ounce that could be a dicey proposition. [Ibid]

Strong Yen and Mrs. Watanabe

The strong yen encouraged many ordinary Japanese---including many housewives---to buy foreign currencies and play the foreign exchange market. Investors bought New Zealand dollars, South African rand and Mexican pesos as well as dollars and euros. In 2010 more individual traders---dubbed “Mrs. Watababe” after the common last name--- bought Australian dollars, with its relatively high interest rates, than U.S. dollars. Mrs. Watanabe investors remained active and were not put off by the currency fluctuation that occurred after the March 2011 earthquake and tsunami. The average daily

In June 2011, the Yomiuri Shimbun reported: “According to market sources, margin trading by Mrs. Watanabe accounts for “about 30 percent of all trading of yen, even after the disaster.” The average daily volume of over-the-counter FX margin trading from Jan. 1 to March 31 was about 7 trillion yen, or about 8 trillion yen if margin trading at the Tokyo Financial Exchange and other exchanges is included, according to the Financial Futures Association of Japan. This is about one-third the average daily volume of trading of yen, which according to the Bank for International Settlements was about 25 trillion yen at the end of April last year. Hedge fund managers and other market players watch Mrs. Watanabe's every move.” b19 Yomiuri Shimbun , June 29, 2011]

On what happned after th March 2011 earthquake and tsunami in 2011, the Yomiuri Shimbun reported: “At the start of trading on March 17, Mrs. Watanabe expected the yen to fall because of the Great East Japan Earthquake. She started selling yen and buying dollars. At the same time, global investment funds--which had anticipated Mrs. Watanabe's move--were buying yen in large quantities, which caused the yen to rise. In fact, that morning the yen hit 76.25 yen against the U.S. dollar, a post-World War II high. In FX margin trading, a function known as a "stop loss"--or "loss cut" in Japanese--means a commodity will be automatically sold when unrealized loss becomes equal to the margin or a predetermined percentage of the margin, to limit the trader's potential loss. The yen's continued rise not only prevented Mrs. Watanabe making the profit she had expected from selling yen, it also activated the stop loss on her U.S. dollar holdings--forcing her to sell at a low price.” [Ibid]

Response to the Appreciation of the Yen

In September 2010, the Japanese government and the Bank of Japan took decisive action to lower the value of the yen, helping Japanese exporters, by selling ¥2.13 trillion in yen and purchasing dollars. It was Japan and the world’s largest single day invention ever and the first time in 6½ that the Japanese government and BOJ had made such an intervention. The intervention seemed to work. Afterwards the value of the yean weakened to the ¥85 to ¥86 range. The Kan government and BOJ said it was prepared to take more action if necessary. Some U.S. lawmakers were critical the move, comparing it to China’s manipulation of the yuan.

Japan made the move unilaterally without support from the Western nations, which had little incentive to intervene on Japan’s behalf because they were having their own economic problems and trying to spur exports, which a lower-valued yen would hurt. Acting unilaterally is usually regarded as a no-no unless economic conditions are highly volatile. In the end the move seemed to have little impact. After the intervention the yen weakened to just above the ¥80 mark, not fare from the postwar low of ¥79.75 in April 1995. In October 2010, the dollar fell against the yen to a new 15½ year low of ¥81.08.

Defiying conventional wisdom exports were strong. In the first half of fiscal 2010 (April to September ) there was the strongest surge in exports in 20 years and Japan’s surplus soared. Gains that Japan has earned from interest earned on foreign currency bonds it bought during exchange intervention---sometimes referred to as “buried treasure”--- amounted to between $10 billion and $20 billion in 2010. The government tapped into the fund to cover a shortfall in its budget.

Toyota, Honda and other Japanese companies responded by shifting their assumed exchange rate projection to ¥80 from ¥ 85 and ¥ 90 and tried to move as much production overseas as possible to cut costs. The IMF lowered its growth estimate of Japan from 1.8 percent to 1.5 percent.

The high yen encouraged Japanese manufacturers to move more operations overseas. Carmakers, steelmakers, electronics companies and precision tool makers moved more operation to China and other countries in Asia and bought more goods from producers that had their facilities outside Japan.. This helped the manufacturers survive but was bad news for Japanese workers and towns that depended on the industries being in Japan.

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back of old 10,000 yen banknote

Value of Yen Rises After the Earthquake and Tsunami

When the Japanese economy was hit by the powerful earthquake and a nuclear power plant accident in Fukushima Prefecture in March 2011, the yen rose to a postwar record-high of 76.25 yen against the U.S. dollar. In May 2011 the value of the yen rose again to the ¥80 to the dollar, reaching ¥79.57 the rise was mainly due, analysts said, to concerns about the U.S. economy. It also dipped below the ¥80 mark in June.

Why was the yen bought up in a time of crisis like? You would think people would be more likely to buy other currencies. According to Kyodo News: “The yen was bought on the back of growing anxiety... Fears over the nuclear power plant accident led to a stock plunge in Japan, pulling down share prices overseas as well. Investors who try to avoid investing in risky assets such as stocks and currencies of emerging economies are fleeing their funds to the Japanese currency, which is considered safe. Speculators have capitalized on such moves, lifting the currency by nearly 5 yen against the dollar.” [Source: Kyodo News, March 17, 2011]

Why was the yen considered ''safe'' even after the earthquake and tsunami in 2011? According to Kyodo News: “The Japanese economy has been suffering from low growth and prolonged deflation since the collapse of the bubble economy in the early 1990s, prompting the Bank of Japan to introduce the monetary easing policy to keep interest rates lower than levels in other countries. Under such circumstances, while it is unlikely the economy will see robust growth, there is little risk of the economy collapsing or the yen falling sharply. In addition, Japan maintains a current account surplus with abundant external assets, making investors feel comfortable buying the yen whenever anxiety grows in the market.

Isn't it strange that the yen is being bought when the Japanese economy itself is a source of concern now? It appears to be a strange phenomenon, but the yen's ''myth of security'' remains persistent, leading yen buying to surpass selling pressure stemming from prospects of deterioration in the Japanese economy. The yen was also bought on speculation that Japanese companies would repatriate overseas assets and convert them into yen to cover disaster-related costs. [Ibid]

How did hedge funds and other speculative funds move? There is a view that they have launched yen buying by capitalizing on speculation that Japanese insurers are repatriating overseas assets to prepare for massive payments of insurance claims resulting from the quake. But insurers have denied that they have sold assets denominated in foreign currencies on a large scale to secure yen funds for insurance payments. [Ibid]

Is the strength of the yen likely to continue? There are many market participants who believe the yen will face buying pressure while the prospects of disaster reconstruction and nuclear power plant troubles remain unclear. But other participants point out that money will be invested in higher-yielding currencies as emerging nations continue to see high growth, reducing the yen's value. Some say overseas investors could start engaging in ''Japan selling'' and bring down the yen if the nuclear power-related troubles deepen further. [Ibid]

Foreign exchanges holding are a measure of economic links with other countries and a manifestation of imports and exports, investment and speculative “hot money” flowing into local markets.

High Value of Yen: Two- Edged Sword

Hiroko Tabuchi wrote in the New York Times, “Considered a haven by investors, the yen has been driven to near post-World War II highs amid Europe’s debt problems and doubts about U.S. economic growth. The currency’s climb has wreaked havoc with Japan’s export-led economy and weighed on the stock market. [Source: Hiroko Tabuchi, New York Times, August 18, 2011]

A strong yen hurts Japanese exporters because it makes their goods less competitive and erodes the value of their overseas earnings when repatriated into yen. Every time the dollar loses ¥1 in value, Toyota Motor loses about ¥30 billion in earnings per quarter, according to the automaker. At the same time, the strong yen has bolstered the country’s purchasing power overseas, an advantage most visibly exploited by Japanese corporations that are seeking to expand.

Tsuyoshi Ueno, senior economist at the NLI Research Institute in Tokyo, told the New York Times that Japan needed to concentrate on the positives of a strong currency and deal with the negatives. “Upward pressure on the yen is likely to continue for some time, and even if the yen were to weaken temporarily, there would be no change to the fact that every time the global economy worsens, the yen strengthens,” Mr. Ueno said in a note to clients. “To escape this cycle, Japan needs to build an economy and industry that not only survives a strong yen, but thrives with it.” Japan needs to foster new industries, like care for its elderly, and seek opportunities overseas, he said.

Still, the response in Japan has been characterized more by panic than anticipation of any potential upside. And the prospect of Japanese companies’ shifting more of their production abroad does little to soothe the anxiety. If the yen continues rising, domestic firms may accelerate their corporate restructuring at home and their shift of production bases overseas, further eroding the foundations of domestic industry.

More than 80 percent of companies are concerned about the continued appreciation of the yen, according to September 2011 Yomiuri Shimbun survey. Asked how they were dealing with the yen's rise, 57 companies named "cost-cutting efforts at home," while 46 firms said they were "expanding the procurement of parts and materials from abroad." [Source: Yomiuri Shimbun, September 23, 2011]

Japanese Firms Shop Abroad Armed with a Strong Yen

In December 2011, The Economist reported: “Corporate Japan is on an overseas shopping spree. Japanese firms spent a record $80 billion on some 620 foreign companies in 2011, according to Dealogic, a firm that measures such things, exceeding the previous record of 466 deals worth $75 billion in 2008. [Source: The Economist, December 17, 2011]

“Kenya Hirose and Yu Toda wrote in the Yomiuri Shimbun, “Japanese financial institutions are increasing their purchases of affiliates or businesses from U.S. and European counterparts following the European debt and financial crisis. The trend is likely to continue, as Japanese financial institutions incurred much smaller losses in the European crisis than their U.S. and European counterparts, and the extremely high yen works to their advantage in such acquisitions. [Source: Kenya Hirose and Yu Toda, Yomiuri Shimbun, June 26, 2012] Hiroyuki Kachi wrote in the Wall Street Journal: “Faced with saturated demand at home, Japanese companies are striving to obtain a bigger slice of market share overseas. The yen's strength is also providing Japanese companies with spending ammunition to press ahead with the buying spree. Since the financial crisis of 2008, Japanese companies have amassed large stockpiles of cash and refrained from capital spending. With Japanese banks willing to finance deals, corporations are in a good position to make acquisitions. [Source: Hiroyuki Kachi, Wall Street Journal, December 14, 2011]

“When Japan Inc went shopping abroad in the 1980s, it was a sign of strength,” The Economist reported:. Japanese companies were spreading their wings because they were growing. This time, it is a symptom of weakness. The Japanese population is ageing and shrinking. The economy is sluggish. Consumption is lacklustre. So Japanese firms find it nearly impossible to expand domestically. At the same time, thanks to crises elsewhere in the rich world, the yen is extraordinarily strong. It has appreciated by 45 percent against the dollar in the past four years. And having learned thrift during their own banking crisis a decade ago, Japanese firms are flush: big listed companies are sitting on a cash pile of ¥60 trillion. [Source: The Economist, December 17, 2011]

“With all this buying power and few opportunities at home, it is hardly surprising that Japanese firms are snapping up foreign companies, especially in fast-growing emerging economies. “Unless we grow we’re not able to stay alive simply by staying in Japan,” explains Tadashi Yanai, the boss of Uniqlo’s Fast Retailing, a big clothing firm. The time is ripe for foreign deals, he chirps. The economic crises in America and Europe have pummelled share prices, making companies cheaper to acquire. [Ibid]

Hollowing Out of Japanese Industries

Economists fear a hollowing-out of domestic industries as Japanese firms consider relocating more business and production bases to other countries. Disruptions to domestic supply chains caused by the Great East Japan Earthquake have forced many companies to consider exiting the nation. Also weighing is the shortage of electricity, which may persist for a long time, as it remains unclear when nuclear reactors suspended for regular inspections will be able to resume operations. [Source: Etsuo Kono and Takashi Asako, Yomiuri Shimbun, July 12, 2011]

Then on top of this is the rising value of the yen. Yoichiro Kagawa and Etsuo Kono wrote in the Yomiuri Shimbun, “Companies struggling to recover from the impact of the Great East Japan Earthquake also have been rocked by the strengthening yen, which has risen to the 77 yen level against the U.S. dollar in Tokyo. Many exporters had predicted the exchange rate in fiscal 2011 would be between 80 yen and 83 yen per dollar, so the rise of the yen beyond this level has put them on the ropes.” [Source: Yoichiro Kagawa and Etsuo Kono, Yomiuri Shimbun, August 1 2011]

Takashi Shiraishi, president of both the National Graduate Institute for Policy Studies and the Institute of Developing Economies, Japan External Trade Organization, wrote in the Yomiuri Shimbun,”Many Japanese businesses have persistently relocated production facilities abroad. As a result, about 220,000 manufacturing sites vanished between 1996 and 2006, causing a loss of about 3 million jobs in Japan. The aftermath of the March 11 catastrophe will likely augment this trend. While the yen remains strong, a situation that dates back to the so-called Lehman shock, the disaster has disrupted Japan's supply chains and electricity shortages are now a real threat. Against this backdrop, businesses are being forced to choose to build production and related facilities at home or abroad. According to a recent survey, nearly 70 percent of businesses are expected to opt to relocate overseas.

Furthermore, central and regional governments in other countries have been making strenuous efforts to attract investment by Japanese companies. For instance, a local government in South Korea has promised to study the possibility of offering three-year and seven-year holidays for corporate and income taxes, respectively. In Vietnam, the owner of an industrial park is reportedly trying to lure small and medium-sized enterprises affected by the disaster to open facilities there as part of its strategy of ensuring a higher concentration of high-tech small and midsized companies

Yoichiro Kagawa and Shoichi Shirahaze wrote in the Yomiuri Shimbun, “The rapid growth of parts manufacturers in other parts of Asia and parts standardization through globalized production also are accelerating Japanese manufacturers' moves to increase procurement from abroad. Currently, major manufacturers are intensifying efforts to cope with the strong yen by buying more parts overseas, while maintaining domestic development and production as much as possible to keep technology levels high. However, this will result in fewer contracts for small and midsize parts makers, and could force them to relocate their operations overseas. With domestic production and exports facing tough times in recent months, Nissan;s Carlos Ghosn said Japanese manufacturers are having to make a tough choice--either increase parts procurement from other nations or become unable to continue production in Japan.” [Source: Yomiuri Shimbun, September 23, 2011]

“Many major manufacturers are procuring fewer parts domestically and buying more components overseas to lessen the impact of the super-strong yen, a trend that is hurting small and midsize firms and could weaken the nation's industrial base. Mitsubishi Motors Corp. President Osamu Masuko said a yen-dollar exchange rate in the 76 yen range against the dollar is “a tough level for companies that are highly dependent on exports. MCC plans to raise the percentage of parts it buys overseas from the current 18 percent to 25 percent in 2013 to cut costs. Nissan Motor Co. President Carlos Ghosn also said his company plans to raise the percentage of parts bought from South Korea and China, as well as Kyushu--from where parts can be shipped relatively cheaply--from about 70 percent now to between 80 percent and 90 percent.

Panasonic said it will reduce the number of companies from which it procures parts to about 10,000, down 40 percent from the current level of about 18,000, in fiscal 2012. Sony Corp. halved its number of parts suppliers by spring 2011.

A July 2011 white paper of the Economy, Trade and Industry Ministry emphasizes the sense of urgency over the situation. The nation needs to take urgent measures to avoid an expanding exodus by securing jobs at home and increasing the potential for economic growth. In a survey of 163 major domestic companies, 69 percent said that accelerating the transfer of supply chain operations, in part or in full, overseas was a possibility. Eighteen percent said there was a "low possibility" of relocating such operations overseas.

William Pesek of Bloomberg wrote: “In reality, hollowing out in one form or another has been Japan’s lot since the mid-1990s, after the economic bubble imploded. High wages, overcapacity and bloated corporate structures led to painful downsizing. Factories closed, jobs went overseas, the lifetime employment that formed the core of Japan’s postwar boom went away, deflation deepened, rust-belt cities such as Osaka and Shizuoka lost their buzz, homeless shelters swelled and the interest rates were cut to zero.” [Source: William Pesek, Bloomberg, July 30, 2012]

Strong Yen Pushes Japan's Per-Capita GDP Higher

Japan's per-capita gross domestic product in 2010 stood at $42,983, advancing to 14th in the rank of developed economies from 16th the previous year, helped by the sharp rise of the yen against the U.S. dollar, the government said. The list of 34 OECD countries by per-capita GDP was topped by Luxembourg, which logged $105,313, while Norway ranked second with $84,473. The United States was eighth with $46,588. The per-capita GDP of China, not a member of the OECD, was $4,430. [Source: Kyodo, December 27 2011]

“Total nominal GDP stood at $5.50 trillion, taking up a global share of 8.7 percent and staying flat from 2009. China, at 9.4 percent, replaced Japan as the world's second-biggest economy after the United States, at 22.9 percent, the Japanese Cabinet Office said. Japan's per-capita GDP has grown only about 11 percent since 1994, when it ranked second in the list of the Organization for Economic Cooperation and Development, as the country's economy has been mired in chronic deflation. In 2010, though, the amount was the biggest ever for the country because it was stated in dollars. [Ibid]

Efforts to Lower the Value of the Yen

William Pesek of Bloomberg wrote: “The truth is, the yen’s strength is beyond control of Japanese officials. Currency intervention won’t work, and neither will flooding world markets with yen. The wild card is how yen-bond sales by big investors affect Japanese yields and global markets. Such sales may deprive the world of one of the few havens left. They also may introduce more chaos into markets that really don’t need it. [Source: William Pesek, Bloomberg, July 30, 2012] So is the speculation about why Japan is tolerating an exchange rate that so many think imperils its growth and sovereign credit rating. One of the most intriguing theories is that it’s a generational phenomenon. A stronger yen mostly benefits the elderly, who are by far the largest voting bloc. It exacerbates deflation, enabling retirees to stretch their pensions and savings. Politicians may be loath to risk electoral support with a weaker yen. [Ibid] Another theory is that Japan wants to encourage mergers and acquisitions to wring out inefficiencies, boost competitiveness and gain new markets. This month’s move by Dentsu Inc., the 111- year-old advertising company, to buy the U.K.’s Aegis Group Plc supports this idea. [Ibid]

Japan’s Government Pension Fund as Force Lowering the Value of the Yen

William Pesek of Bloomberg wrote: “Something is afoot that might reverse the yen’s climb in ways Japan might not like, thanks to the world’s largest pension fund. Demographic trends are prompting Japan’s Government Pension Investment Fund to trim its debt holdings. That’s huge news in bondland. The fund oversees $1.45 trillion of assets, an amount greater than China’s holdings of U.S. Treasuries and more than most sovereign-wealth funds have to invest. This bond whale makes the $263 billion Total Return Fund run by Bill Gross of Pacific Investment Management Co. look like a minnow. [Source: William Pesek, Bloomberg, July 30, 2012]

“The pension fund’s move may signal a weaker yen in three ways. First, as Japan ages, huge pension funds will have to invest more abroad for higher-yielding assets. Second, the Bank of Japan will have to add more liquidity to the financial system to absorb large bond sales, which is essentially another quantitative easing. Third, it means the big money will be bidding less on government debt auctions. All of this may have other major debt holders, Japanese or otherwise, considering sales of their own. And selling debt today might lock in much richer gains than a year from now. [Ibid]

“Does this mean the day of reckoning that bears have warned of for so long is upon us? Is what’s arguably the world’s biggest bond bubble bursting? It’s a question worth asking. More than $10 trillion of savings in Japan needs a home somewhere, and public debt, negligible yields aside, will still have ample support. Yet 10-year Japanese yields, now at a nine-year low of 0.77 percent, are likely to rise at some point. [Ibid]

“The most immediate issue is fresh volatility in currency markets. In a stable and rational financial world, higher yields might make the yen more attractive as investors seek fatter returns. But worries about Japan’s bond market could damage the nation’s refuge status. That would pressure hedge funds, portfolio managers, banks and individual investors to find alternatives. [Ibid]

Small-Time Japanese Investors Bet on the Strong Yen

The Yomiuri Shimbun reported: “Increasing numbers of people are opening foreign currency deposit accounts to take advantage of the yen's historically high levels. If the yen's value against the U.S. dollar, euro and other major foreign currencies falls, depositors can earn profits by exchanging their foreign currency deposits into yen. However, the accounts carry a degree of risk. Losses may balloon if the yen appreciates further and may even cause a loss of principal. [Source: Yomiuri Shimbun, October 10, 2011]

“A 70-year-old man in Hyogo Prefecture began depositing money in U.S. dollars in mid-July using a major bank's Web site. "Because the yen's exchange rate had appreciated to 80 yen against the dollar, I thought it was the best time to buy [U.S. dollars]," he said. He exchanged about 800,000 yen into 10,000 dollars. The man is not alone. According to statistics from the Bank of Japan, the total amount of money deposited in individual foreign currency accounts has continued to rise in recent years. In March, when the Great East Japan Earthquake hit, this surpassed 5 trillion yen for the first time. [Ibid]

“Yen can be exchanged for the U.S. dollar, euro and other foreign currencies and deposited in foreign currency accounts at most major banks. Depositors can invest also in many other foreign currencies, such as the British pound, Swiss franc and Australian dollar. Sony Bank, which specializes in online services, started a deposit service for the Brazilian real in May 2011. "We have already dealt with several billions of yen as people are attracted by Brazil's growth potential as an emerging economy," said Yuichi Wada, an operating officer at the bank. Some banks have begun to deal with the Chinese yuan. [Ibid]

“However, would-be depositors should exercise caution. Yasuhiko Fukano, a financial planner, warned, "Depending on moves in foreign exchange markets, there is a risk people may even lose [substantial amounts of] their initial investments." For example, if a person deposits 10,000 dollars when the yen's exchange rate is 75 yen against the U.S. dollar, the foreign currency is worth 750,000 yen. When the contract matures or if the depositor withdraws the money before maturity when the rate is 80 yen against the dollar, the 10,000 dollars deposit is worth 800,000 yen, a profit of 50,000 yen. But if the yen appreciates further to 70 yen against the dollar, the 10,000 dollars deposit will only be worth 700,000 yen, so the depositor will lose 50,000 yen. [Ibid]

“However, Fukano says this calculation does not take interest rates into consideration. "Among major foreign currencies, the Australian dollar-denominated deposit service is probably the only one with relatively high interest rates. Because interest rates in many other foreign currency deposits are low, it's difficult to offset losses from further appreciation of the yen with interest," he said. The man from Hyogo Prefecture related his own experience:"I planned to withdraw the money when the yen's value fell. But it appreciated further.” [Ibid]

“Commission fees--compulsory fees when the yen is exchanged into a foreign currency and when the foreign currency is exchanged back into yen--are another factor investors need to be aware of. "When you choose to deposit foreign currencies, pay attention to the commission fees," said economic journalist Hiroko Ogiwara. "Even if the exchange rate is the same at the time of deposit and withdrawal, the required commissions will ensure a loss," she said. Commission rates vary among foreign currencies or among financial institutions. In the case of the U.S. dollar, most major banks charge 1 yen in commission per dollar when both deposits and withdrawals are made. But many online banks charge lower commissions--about 0.25 yen per dollar.Some major banks lower their commission rates if depositors make transactions via online accounts. "If people take time to understand the systems and risks involved, and make such transfers using affordable amounts, I have no hesitation in recommending foreign currency deposits," Fukano advised. [Ibid]

Direct Yen-yuan Conversion Possible

Starting in June, 2012 it became possible to exchange the Japanese yen with the renminbi, or yuan, in the Tokyo and Shanghai markets. In the past, it was not possible to directly exchange the yen with the yuan. Instead, the yen needed to be converted into the U.S. dollar, which was then changed into yuan. Exchanges in the opposite direction also required the yuan to be changed into the dollar and then the yen. [Source: Yomiuri Shimbun, June 19, 2002]

“But now the yen and yuan can be directly exchanged. This means the commission on exchanging currency will only be paid once, instead of each time a conversion between currencies is made, as in the past. Why was there such complicated procedures in the past? The Chinese government previously only allowed the yuan to be used domestically. Beijing feared that if the yuan was used in other countries, it could be subject to foreign influence, making it difficult to control. But as exchanging money is necessary to buy and sell goods in foreign trade, China enabled the yuan to be exchanged into foreign currencies by using the U.S. dollar as an intermediary. The dollar is the currency of the world's largest economy and military power, so it has been trusted internationally for years. [Ibid]

“Why did China change its policy? China, a new economic power, wants the yuan to be more widely used around the world. If the yuan continues to rely on the dollar, it could be subject to large fluctuations in the value of the U.S. currency. Beijing does not want that to happen. The direct yen-yuan exchange will likely make it easier for Japan and China to buy and sell goods between each other. [Ibid]

Image Sources: 1) coins and old banknotes markun.cs.shinshu-u.ac.jp 2) new banknotes Big Globe net and zentech.com

Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2009 Jeffrey Hays

Last updated October 2012

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