Powerless to Stop the Yen's Rise
Reviewed By Hitoshi URABE
"Powerless to Stop the Yen's Rise"
By Darrel Whitten from IR Corp / Invest Avenue
The article is a good commentary and a worthwhile analysis of Japan's present economic situation by focusing on the behaviors of the financial market.
Japan's economy had had supposed to hit bottom, and was hoped to be in a slow but steady recovery phase. The Tankan report publicized by the Bank of Japan earlier in the month showed that there was confidence being built gradually among corporations. (See News Review #45 dated July 2.) As was pointed out at the time, however, when the Tankan was being prepared, the dollar-yen exchange rate was expected to hover around 125 yen for the rest of the year.
The rate moved quickly since then and it is close to 115 yen to the dollar. For Japan it is an upsurge of yen, but the phenomenon is generally viewed as the plunge of the dollar because, for one thing, the euro and other currencies are also gaining value to the dollar. (The euro has just hit the parity mark, one euro to one dollar, after more than two years.) And the reasons behind this falling dollar is clear, a loss of confidence toward the U.S. economy and the way it is operated, which are vividly represented by the double deficits of the budget and the trade balance, and the corporate scandals that have made people apathetic to equity markets.
Whatever or whomever is to be responsible, it is truly unfortunate for Japan. Export would be the engine for Japan's recovery, and the high yen would be detrimental to the struggle to promote it.
Japan's equity market has kept sliding for more than a month. This was initially been explained as a repercussion to the restrictions on short selling, a rule introduced earlier in the year, which successfully uplifted the equity prices toward the end of March, with the cost of distorting the market. It seems now, however, people have really been losing confidence in the stock market that resulted in resorting to government bonds, which could be a reason for keeping its value despite the Moody's' lowering the credit rating in May to A2.
The government intervened in the foreign exchange market reportedly seven times since early spring, to buy dollars in exchange for yen. Mr. Shiokawa, the Finance Minister, has declared recently that he would "never allow the yen to go back to 115 or 116," which was simply neglected, and actually risked loss of faith in his capabilities by revealing his naivety toward markets. He might be playing the role of a sympathetic figure, however. While being the Finance Minister, a key member of the Koizumi cabinet that has been losing popularity recently, an economic recovery is desperately needed.
Whether the objective is to save his political allies, Mr. Shiokawa needs to show the determination and behave professionally to carry out his policies, as he is in a position responsible for the budget and the financial market to support Japan to regain economic health.