What is happening to the Japanese yen?

The yen has been getting stronger since the earthquake and tsunami hit last week hitting its highest level against the US dollar in 65 years at one stage.

What's happening to the yen?

Ever since the earthquake and tsunami hit last week, the Japanese currency has been getting stronger. After London traders went home on Wednesday night it hit its highest level against the US dollar since the second world war at 76.25. It slid back slightly on Thursday morning to around 79.

Why is it strengthening when the economy is going to be damaged?

There are two likely reasons. The first is that Japanese insurance firms and other corporations are "repatriating" cash exchanging their foreign-denominated holdings for yen to pay for the cost of handling the crisis. However, the big move in the yen happened when the Tokyo market was closed, so analysts say it is unlikely to have been driven by these large firms. The second reason is the unwinding of the so-called "carry trade" a popular investment strategy in which traders take advantage of ultra-low interest rates in Japan, by borrowing in yen and reinvesting the proceeds in some other, faster-growing stock market overseas exchanging the yen for Brazilian real, New Zealand dollars, and so on. Nervous investors may have started to reverse this bet in recent days, bringing their overseas investments back home, and strengthening the Japanese yen in the process.

So why have they changed their minds?

Amid the past week's dramatic events, analysts believe Japanese investors may be showing more of a "home bias" a tendency to want to hold their savings in their own currency. This is a common reaction in times of crisis, and could bring a wall of money flowing back into the yen. Overseas investors may also be tempted to reverse the carry trade, if they judge that the knock to confidence from events in Japan and the Middle East mean that growth in emerging markets will be weaker than expected.

What does a stronger yen mean for the Japanese economy?

It's bad news: Japan is heavily dependent on exports for generating even the meagre economic growth of the past few years. The level of alarm at the Bank of Japan and ministry of finance about the strength of the currency is indicated by the decision to call a conference of G7 finance ministers on Friday morning Tokyo time.

What can ministers do about it?

They could just issue a strong statement saying they are monitoring the strength of the yen; or they might announce a co-ordinated programme of intervention, to prevent the currency strengthening further in the coming days.

Will the strength of the yen last?

Many analysts believe the yen will weaken again once the immediate crisis is over, and there is more certainty about the fate of the nuclear reactors at Fukushima. The Bank of Japan has already injected more money into financial markets in an increase of its pre-existing quantitative easing programme, and the costs of the crisis are likely to mean a further painful increase in the Japanese government's debt, which already stands at 200% of GDP. And while reconstruction efforts should eventually boost demand, in the short run widespread factory shutdowns and the loss of industrial capacity in the devastated regions will mean the Japanese economy is extremely weak. None of that should be good for its currency.

Why is the Yen still getting stronger against the dollar?

You have a valid question that why is Yen getting stronger despite Earthquake, Tsunami & Meltdown. Furthermore, Japans economy is largely dependent on exports and strong Yen makes Japanese exports more expensive and overseas repatriation will send fewer Yen into Japan. In real sense they are all negative for the economy, as the immediate follow up would be reconstruction, housing, roads, and dams, which means more financial burden on the country already ridden with 200 pct debt. Soon after the news of Earthquake & Tsunami the Japanese currency was initially sold and USD touched two-week highs. But then the investors realized that insurance cost will be huge and the insurers would rush to raise cash by selling their foreign assets, which saw demand for YEN. In a similar situation in 1995 KOBE earthquake, Yen made substantial gain. As we are approaching Japanese year end that is March 31, Dollar is likely to come under renewed selling pressure versus YEN as repatriation of profit by the Japanese companies abroad and YEN purchase by the insurance companies by selling their foreign asset to pay damage claims will see demand for Yen. But then more coordinated Central Bank intervention will also be seen to reduce volatility. Therefore, anything above 83.80 would be a good USD sell as buyers of YEN would scramble to purchase YEN, as speculators and investors would certainly challenge Global Central Banks more frequently, as it likely to re-test 76.20 and bounce back. YEN/USD volatility will be seen more often.

Currency Wars: Strong Yen Is Destroying Japanese Industry

The thing to understand about inflation is that if one major country does it, all the others have to do it too. A single country can benefit by making its currency less valuable, because a falling exchange rate gives its exporters a pricing edge in global markets. But the pop in exports comes at the expense of competitors who then demand that their governments join the currency race-to-the-bottom. This happened to Switzerland in September, as global capital poured into what was seen as a financial safe haven. The Swiss franc soared, traumatized local exporters complained, and

the government pegged the Swiss franc to the euro, in effect putting it on the same road to oblivion as Europes doomed common currency. Now its Japans turn: Toyota Slams on the Brakes Car Maker Cuts Profit Goal by 54%; Strong Yen Is Destroying Japanese Industry TOKYOToyota Motor Corp. slashed its profit outlook by more than half, reflecting the corrosive effect of the strong yen and signaling a deeper threat to car makers recovery. The Japanese auto giant Friday also lowered its global sales outlook to 7.38 million vehicles for the fiscal year ending March 31, an admission Toyota could lose its crown as the worlds largest car maker this year, a title it took from General Motors Corp. three years ago. Toyota has been wounded by two natural disasters and the rise of the yen against other currencies. Just as the companys production was rebounding after Japans massive earthquake in March, it was hit by flood damage to key component suppliers in Thailand and a record yen. Those setbacks have eroded Toyotas position against global rivals including Hyundai Motor Co. and Volkswagen AG, and pose longer-term worries for one of Japans most important industrial giants. Toyota has lost 2.5 percentage points of the U.S. auto market for the 12 months ended in November. Its stock price in New York has fallen 33% since the end of February. Toyota officials have said that at exchange rates below 80 yen to the dollar, the company loses money on subcompact exports such as the Yaris. The dollar and euro weakness against the yen reduces the price competitiveness of Japanese exports in overseas markets and erodes the value of foreign profits on corporate Japans balance sheets. Satoshi Ozawa, Toyotas chief financial officer, said one of the reasons the auto maker was exposed to the Thai floods was because so much of Japanese industry has been shifting manufacturing operations offshore to escape the high yen, including auto parts makers. The fact that production of some electronic parts has been offshored [to Thailand] signals how the destruction of Japans industrial base is proceeding apace. I find that very shocking, he said.

Toyota still makes in Japan nearly half the vehicles it sells globally, leaving it more exposed to currency risk than Japanese rivals Nissan Motor Co. and Honda Motor Co., which make about a third of their respective output in Japan. For its current fiscal year, which runs through next March, Japans biggest car maker by volume said it now projects a net profit of 180 billion ($2.32 billion), down 54% from a previous estimate announced in August and less than half the 408 billion it earned last year. Toyota expects the shortage of parts from Thailand suppliers to be fully remedied by next March. But it projected continued yen strength next year, which bodes ill for a quick earnings rebound. The Toyota City-based companys new forecast assumes an average exchange rate of 77 to the dollar from this month through March, and 105 against the euro. That is up from 86 to the dollar and 113 to the euro in the last fiscal year. The rate was 77.6463 yen to the dollar at the end of Fridays trading. At current exchange rates, the company forecasts a parent, or unconsolidated, loss of 80 billion yen, which would mark its first dip into the red in reported after-tax income. If mighty Toyota cant turn a profit with the yen at current levels, the Japanese government has no choice but to lower the value of its currency. It will accomplish this by creating hundreds of billions of dollars worth of yen and using them to buy euros and dollars, sending the dollar and euro up and yen down in relative terms. Once a process like this gets going it cant be stopped because no single central bank can step off the track without seeing its currency soar and its export industries implode. The ultimate end, of course, is the descent of the worlds major currencies to the value of the paper on which theyre printed. As crazy as this seems to modern sensibilities, it isnt historically unique. Just the opposite. All fiat currencies end this way, a victim of politicians (or kings) need to satisfy powerful constituencies. Give a government a printing press, in other words, and it will always, eventually, destroy its currency. Meanwhile, in each and every past case of currency destruction, the owners of gold and silver were not only spared the worst of the trauma, they were enriched.