January 26, 2009

Should Japan weaken its Yen?

The Japanese yen is breaking its own record. The Yen rose against the dollar reaching its highest level for the last 13 years. Not only that, the yen also advanced toward a seven-year high versus the euro and the U.K. pound. It would be safe to say that traders dealing with the yen maybe jumping with joy.

Based on the data provided by Tokyo Forex & Ueda Harlow Ltd, the yen appreciated to 88.54 per dollar as of 9:31 a.m. in Tokyo from 88.75 late in New York on Jan. 23. It reached 87.13 on Jan. 21, the strongest level since July 1995. Against the euro, the yen strengthened to 114.18 from 115.12 at the end of last week. Japan’s currency touched 112.12 on Jan. 21, the strongest level since March 2002. The euro fell to $1.2894 from $1.2975. The yen may advance to 87.80 per dollar and 113.50 versus the euro today.

However, not everyone is happy with the yen’s record-breaking surge.

Just like all currencies in powerful (and not so powerful) countries, a soaring yen has good and bad effects in Japan’s ailing economy. A strong yen makes business tough on Japanese exporters. The tourism industry is likely to suffer the same fate. As Fujio Mitarai puts it "The current rise in the yen across the board is not good for the Japanese economy." Mitarai is the chairman of Nippon Keidanren, Japan's most powerful business lobby.

And as Japan’s economy hurt from the high exchange rates, calls for the Japanese government to intervene and weaken the yen become stronger. But the (expected?) move might be unwelcomed. U.S. Treasury Secretary-designate Timothy Geithner has wasted no time making it clear that the Obama Administration will oppose any moves by Japan or China to weaken their currencies.

"I believe that it's very important for the U.S. and for the global economy that our major trading partners operate with a flexible exchange rate system, in which market forces determine the value of exchange rates," said Geithner after he was asked about the possibility that Japan may intervene to weaken the yen.

And yet, the warning, it it is indeed a warning from newly inaugurated President Obama, is not scaring the Japanese governmenr. When asked about the possibility of the government entering the currency markets soon Japanese Finance Minister Shoichi Nakagawa said that he will not comment at present.”But we should always be thinking about doing what may be necessary," he added.