No easy fix for yen’s persistent weaknessーNHK WORLD-JAPAN NEWS
The yen has been getting steadily weaker against the dollar. That has big implications for the economy, businesses, and households. That’s right. And households are especially feeling the pinch as the weaker yen means higher prices for all sorts of imported goods from groceries to gasoline. Yukov Fushima from our business desk joins us now to examine what’s behind the weak yen. What could happen next? Yes, traders, investors, money managers are all watching the currency market closely as they see the yen getting close to the level where the government and the bank of Japan intervened last year to prop it up. The yen tubble to a low not seen in 10 months last week. There are worries that the economic package rolled out by Prime Minister Takichi Sai will lead to a worsening of Japan’s finances. One currency expert, Yoshidashi at Manx, says the yen is not the only thing under pressure. Japanese government bonds are being sold off as well, causing their rates to rise. The movements of long-term rates of Japanese government bonds explain how the dollar yen has been moving over the past several months. This is rather odd, isn’t it? If rates rise, you would think people would buy the yen to get better returns from higher rates. But rates are climbing and the currency is falling. When we overlay the charts of long-term rates and the yen, we see they are moving in correlation. What we can deduce is that funds are moving out of Japan. This is why rates are rising. And yet, Japanese stocks had recently been scaling record highs. Just last month, the benchmark NIK index surpassed 52,000 for the first time. Yoshida notes the trend has gone into reverse in November. I think Japanese stocks surged so much, not because investors evaluated the government’s new economic policy highly. I think stocks went up because stocks around the world climbed. So when prices of global stocks slipped back, Japanese stocks came down as well. When Japanese stocks sell off, you see all three of Japan’s main asset classes, the currency, bonds, and stocks being sold. I think that points to an outflow of money from Japan. Some investors anticipate the government will soon intervene as the yen near where it was last year when the authorities massively stepped in to prop it up. The government and the central bank intervene that July for two days in a row. The dollar had been hovering around 161 yen, but the massive yen buying triggered others to follow suit. The currency recovered to the 139 level in September. But Yoshida says this time is different. He says last year it was speculative traders who were the main sellers. Speculative traders are those who buy and sell in short periods of time. They could lead yen selling in the market. But when a government intervenes with huge trading and the yen selling stops, these speculative traders turn to buying. That’s why last year the yen weakened to 161 to the dollar. But after the speculative traders bought the yen back, the currency strengthened by 20 yen to the dollar, which traded close to 140 yen within a short period of time, less than a month. Yoshida says the data show it is not speculative hedge fund traders who are now selling such traders had a massive position in July last year but not this time around says it’s not too difficult for the authorities to stop the yen from falling when speculators are involved but that is not the case right now if huge amounts of funds are flowing out of Japan it will be difficult to buy up the yen to stop the flow flow through government intervention. I think that if the government does intervene, it will be further into the future, for example, when the pair gets to around 165 yen to the dollar. But even when officials intervene, I think it will be difficult to change the currency market trend. Yoshida says there is an alternative possibility that the yen could actually strengthen going forward. There are doubts that the current surge in global stock prices will continue. We are hearing people from various fields warning that stocks are overpriced. The professionals call excessive overpricing a stock market bubble. If the bubble bursts, there could be an outflow of funds from the US. The amount of money flowing out of the US could be much bigger than the outflow we are now seeing from Japan. When that happens, we could see a halt in the yen’s weakening. And there is a fair possibility the dollar will weaken further. The result would be the yen strengthening from where we are now. Yoshida says it is very difficult to know when a bubble will burst. It could be tomorrow or several years from now. So, it could be some time before the yen strengthens significantly from where it is
As the yen continues to weaken, speculation is growing that the authorities may try to support the currency. But it is far from certain whether this would be effective.
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