Before anything, let me just say fundamentals are not an “end-all” kind of thing when talking of currency valuation. However, one has to question whether the yen’s edge over the dollar is warranted at all or at the very least, logical. A brief look at the economic fundamentals of Japan would reveal some depressing figures.
Firstly, Japan’s debt to GDP ratio is over 200% – almost three times the US (and to think that US gets ridiculed for their debt!). Secondly, the most recent Tankan surveys indicated that economic conditions have worsened for the fourth consecutive quarter. Consumer spending also remained subdued as retail sales have continually fallen since October 2008. Lastly and probably most importantly, the country’s unemployment rate currently stands at 6.5 years high of 5.5%. The last time joblessness was this high, USDJPY was trading at the 120.00 price level.
Although the facts seem depressing, we also have to remember that the global economy is in a period of rebalancing too. The global landscape has been altered by the financial crisis and simply relying on the West to go back to their old habits of spending just won’t cut it anymore. Japan, together with its Asian neighbours, need to play their own parts in economic recovery by stimulating domestic demand. The IMF echoed this in their most recent meeting and suggested that some Asian nations could adopt currency intervention to boost their respective currencies.
However, Japanese Finance Minister Fujii seemed to be strongly opposed to currency intervention, saying that such action could destroy a free economy. Less than a month later, he shifted his stance and mentioned that the central bank would not hesitate to take action once currencies show an excessive move against a biased direction.
I took a look at BigPippin’s sweet chart art and saw that, indeed, the yen has been on a mad run, especially against the dollar. The USDJPY has recently touched the 88.00 handle, a level it hasn’t hit since January of this year. Looking further back, we see that the USDJPY had been trading as high as 101.00 earlier this year.
The possibility of currency intervention aside, other big questions loom as the Bank of Japan (BOJ) gears up to release its monetary policy statement this week. Would the BOJ leave its overnight rate at 0.1% and make no adjustments to its bond purchase programs as expected? The central bank has been sitting idly on its hands for the past few rate decisions… Why would it do anything extraordinary now? Of course there’s always the chance that the BOJ is secretly revving up to unveil a new stimulus plan that could suddenly shake things up in the currency market. Still, it seems like the BOJ simply has no more tricks hiding up its sleeve.
Take note that since the start of the recession, the bank has lowered its interest rate to an ultra low 0.10% while at the same time buying corporate debt to provide Japanese firms some liquidity, cash-wise. But as firms start to regain access to private funding, the need for debt-purchase financing has whittled down. There are rumors that the bank may let its debt-buying program expire as scheduled on December 31.
The Bank of Japan is left in an impasse between keeping a ‘wait-and-see’ attitude and following the footsteps of other central banks. Just recently, the Reserve Bank of Australia hiked its interest rate from 3.00% to 3.25%. In addition, the US Fed extended the purchase dates of its $1.25 trillion mortgage-backed securities buying program from December 31st up to the end of the first quarter 2010 to promote a smoother transition in markets. Given how the economy is showing some signs of recovery, would the BOJ follow suit?
The BOJ is stuck between a rock and a hard place. On the one hand, highlighting the strengths of the Japanese economy and showing any intention of implementing exit strategies could pump the yen higher. On the other hand, pinpointing the weaknesses in exports and manufacturing could result to risk aversion… which may lead to a yen rally. With Japanese manufacturers already distressed about the strengthening yen, the BOJ is careful not to do anything to worsen the situation. Ironically, it seems that doing nothing might be the best move that the BOJ could make.