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A strong yen is causing concerns about Japanese export earnings, as
the US dollar fell below 96 yen, its lowest level for 13 years.
BBC 24 October 2008
In Tokyo, the Nikkei dropped below the 8,000-mark for the first time in more than five years.
US dollar lowest level against the yen since May 2005.
By 1135 GMT the US currency was at 106.19 yen, off a low of 105.97.
BBC, January 16, 2008
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Yen hits 18-month high of Y109.13 against the dollar
Investors unwind carry trades
FT November 12 2007
Traders retreated from risky assets amid heightened nervousness over the state of the financial sector.
Analysts said sliding Asian equity markets had seen investors unwind carry trades, in which low-yielding currencies such as the yen are sold to fund the purchase of riskier, higher-yielding assets elsewhere.
Buy The Yen Now
You may recall that in only three days during the crisis surrounding
the 1998 crackup of Long-Term Capital Management, the yen rallied by 18%.
James Grant, Forbes 26/3 2007
The yen is a piece of paper of no intrinsic value. Then again, so is every other currency under the sun. Each derives its value from the stamp of a government. What sets the yen apart is its tiny yield, five percentage points less than the money rates available in the U.S. and U.K., never mind the customarily higher-yielding currencies of Brazil, Turkey, Indonesia and other such subprime nations.
I believe that the yen is a worthwhile investment. It's a bargain in fundamental, purchasing-power terms, for one thing. And it provides low-cost disaster insurance, for another.
Without exactly knowing, one can be mortally sure that the world is more highly leveraged than even the fretful central bankers suspect. If so, a bear market in any of the popular classes of investment assets would likely turn today's rush to borrow yen into an even faster race to repay it.
James Grant's homepage at www.forbes.com/grant.
James Grant at internetional.se
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The G-1 (G-7 slang for the US) has traditionally led the opposition to multilateral exchange rate management. The Fed doesn’t want to subordinate domestic monetary policy to an external target.
Brad Setser Mar 13, 2007
Nej, fast växelkurs, det är inte bra. Det lärde sig alla, utom Carl Bildt, hösten 1992.
That is why EMU will collapse.
Chinese purchases of yen
China reportedly wants to diversify large portions of its $1,000bn of foreign exchange reserves out of dollars.
It is otherwise likely to sustain one of the largest capital losses in history
Fred Bergsten, Financial Times 13/3 2007
Very Important Article
China reportedly wants to diversify large portions of its $1,000bn of foreign exchange reserves out of dollars, where most of them are now held. It is otherwise likely to sustain one of the largest capital losses in history, in terms of both its own currency, the renminbi, and external monies such as the euro, as the dollar inevitably falls by 20 per cent or more against virtually all currencies over the next few years to help correct the unsustainable current account deficits of the US.
Chinese diversification of several hundred billion dollars into yen would promote both systemic and Chinese national interests. It is almost universally agreed, including in Japan, that the yen is substantially undervalued against all currencies, except the renminbi itself and perhaps a few other Asian monies, even after its recent modest rise. Adjusted for inflation, the yen is weaker today than in 1998, when the US and Japan intervened jointly to reverse its precipitous decline, and in 1985, when the Plaza Agreement initiated intervention by the Group of Five leading industrial countries to weaken the dollar, especially against the yen.
Full text of this excellent article
The risks ahead for the world economy
Fred Bergsten The Economist print edition Sep 9th 2004
Very Important Article
Kommentar av Rolf Englund:
Problemet är att när yenen stiger mot dollarn så går det illa för alla som har ägnat sig åt Carry Trade i yen
(Låna yen nästan gratis - köpa andra tillgångar - och tjäna en väldig massa pengar - until the music stops, as they say...
När svenskar carrytradade på slutat av 1980-talet (före det här otrevliga 1992)
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Unwinding the Yen, Unravels Global Stock Markets
The Nuts and Bolts of the “Yen Carry” Trade
Land of the rising yen
John Plender, FT, September 21, 1999
Currency markets, rather than policy makers, hold the key to the
future of the world's two largest economies. There are few more
sensitive prices in the world economy than the yen-dollar exchange
And as finance ministers from the Group of Seven industrialised
countries meet in Washington this weekend, they will be all too aware
that the yen's surge against the dollar this year has the potential to
blow the world's two largest economies off-course.
In Tokyo the Nikkei index has wobbled in recent days, reflecting
fears that the yen's rise will throttle exports and undermine the
fragile Japanese recovery. Meantime the depreciation of the dollar
carries inflationary risks that will make it harder for the Federal
Reserve to avoid raising interest rates.
Nervousness in the markets has been exacerbated by an extraordinary
row in Tokyo between the Ministry of Finance and the Bank of Japan
over the appropriate policy response. An argument about intervention
in the currency markets has become entangled with the question of
whether the Bank of Japan's recently won independence is under threat.
While the currency has fallen back from last week's peak of ¥103.25,
short term market movements will hinge on the outcome of today's
meeting of the Bank of Japan's monetary policy board and deliberations
in Washington at the weekend.
But what are the longer term factors behind the large swings in the
Between the spring of 1995 and August last year the dollar
appreciated by more than 80 per cent. This astonishing surge was
helpful in shifting demand from a buoyant US economy to a Japanese
economy that was close to toppling over into deflation.
But there was an awkward side effect, as the weaker yen depressed
the exports of Asian countries that pegged their currencies to the
dollar. This contributed to the contagious currency crises that
erupted in 1997-98.
With hindsight it is clear that the dollar's strength was reinforced
by the accumulation of official reserves in Asia in the pre-crisis
period. As capital poured into dollar-pegged Asian tiger economies,
the Asian central banks had to sell their own currencies in exchange
for dollars to prevent their exchange rates from appreciating.
Then when the dollar pegs gave way private sector flows took over
from official flows as the driving force. With short term interest
rates in Japan at close to zero, banks and hedge funds financed
positions in higher-yielding currencies by borrowing in yen. This "yen
carry trade", as it was called, helped keep the yen cheap.
The strategy assumed, bizarrely, that there was no risk that the yen
would appreciate, thereby causing growing yen liabilities. Speculators
seemed to think the currency movements could only be in one direction,
and that their investments in other currencies would show a positive
income return as well as an appreciation against the yen.
The carry trade came unstuck in the financial crisis last autumn.
Spectacularly so: the yen-dollar rate saw the biggest one-day swing
since the collapse of the Bretton Woods exchange rate regime in the
early 1970s. Over two days on October 7 and 8 the US currency plunged
by more than 13 per cent to ¥117.
An internal paper of the Japanese Ministry of Finance estimates that
the carry trade was worth over $40bn at its peak in June last year. By
this January it had slumped to zero. David Hale of Zurich Financial
Services points out that the resulting reduction in leverage in the
global system helps explain why the financial shocks of 1999 such as
Brazil's devaluation proved less disruptive than the upsets of 1998
such as the Russian default and the problems of the Long-Term Capital
Management hedge fund.
Meantime a recent rebound in the carry trade has been outweighed by
conventional capital flows, as Western investors have responded to
signs of recovery in the Japanese economy by buying the Tokyo equity
The snag is that the uplift in equity prices has started to look
increasingly suspect because of the yen's continuing appreciation.
From 1997 to 1998 Japanese exports fell from $409bn to $373bn. The
average exchange rate in 1998 was ¥131 against today's much less
competitive ¥106.57. If Japan remained in current account surplus
last year, it was chiefly because of the collapse in imports (see
Those who believe that Japan suffers from a structural savings
surplus rather than a cyclical one are worried about a more
fundamental problem. The personal sector of the economy is unlikely to
reduce its surplus as long as industrial restructuring fosters
insecurity and squeezes incomes. So growth is dependent on exports,
which are very sensitive to the present overvalued exchange rate, or
on government budget deficits.
As Andrew Smithers of fund management advisers Smithers & Co
puts it, a budget deficit running at 10 per cent can only be a
temporary stimulus to growth because it is unsustainable over the long
run. And if the deficit is allowed to run at this 10 per cent level
for any length of time, it is wholly implausible that investors will
finance it at the record low interest rates that prevail in today's
Japanese government bond market.
In fact there is a looming crunch in the market. During the next two
years high interest Post Office accounts, which are traditionally
invested in government bonds, mature. The money is unlikely to be
recycled back in the traditional way into the government bond market
via the government's Trust Fund Bureau.
The authorities will thus face a choice. They can let the bond
market collapse and yields rise to whatever level will tempt the
personal sector back into the market to buy the government's IOUs. Or
they can monetise the government's debt, for example by selling it to
the banks - the modern equivalent of printing money.
In the absence of such a signal, the markets may find it hard to
convince themselves that the yen's change of direction last week is a
genuine watershed. Without a palpable shift in policy, any attempt at
concerted intervention in the currency markets after the G7 meeting
would be unlikely to have a lasting impact because joint intervention
tends to work well only when it goes with the market trend.
The US, meantime, faces an equal and opposite set of imbalances,
which are not helped by dollar weakness. The US private sector is
running a deficit of close to 6 per cent of gross domestic product,
while the household savings ratio is negative for the first time since
the inter-war Depression.
The counterpart of this private sector shortfall of savings against
investment is in the balance of payments. There a deficit now
approaching 4 per cent of gdp has operated as an inflationary safety
valve, permitting excess domestic demand to be met from overseas
A decline in the dollar is threatening on two fronts. First, the
re-emergence of the yen as a credible repository for global capital
means that the US payments deficit becomes harder to finance. Second,
a weaker dollar increases inflationary pressure in the US economy.
The risk is that the Federal Reserve might be forced to raise
interest rates further than would otherwise be necessary to stabilise
the external account and curb domestic demand. This might be a wake-up
call for the many US investors who have put their faith in new
paradigms. The sudden discovery that the present looks more like the
past than the happy visions of the future peddled by the more cheerful
Wall Street pundits might cause a virtuous circle to break.
Decline on Wall Street would mean a negative wealth effect. People
whose capital was shrinking would start to rebuild their savings from
today's low levels. That would act as a powerful brake on demand.
Against that, it could be argued that a weaker dollar, far from
being a scare story, is the natural mechanism to bring about balance
of payments adjustment. And if that poses problems for the Japanese
recovery, the Japanese government appears to be ready with another
pump-priming fiscal package to keep the show on the road.
As for the policy impasse in Tokyo, if it persists, decision-making
power will simply be transferred from the Bank of Japan and the
Ministry of Finance to the bond market. But if, as seems likely, the
printing presses roll, the yen will weaken. The resulting boost to
exports will help perpetuate the economic recovery and provide the
means to reduce budget deficits.
In the interim the scope for upheavals in currency and capital
markets is nonetheless uncomfortably wide. A US recession induced by
tumbling stock prices on Wall Street would not leave the world economy
But nor need a correction or a bear market in the US be a disaster.
The good news this autumn is that the continental European economies
are at last powering ahead. The weakness of the euro against the
dollar can now be seen to have played a constructive part in
rebalancing global economic activity.
Moreover, stock markets in continental Europe are still so small in
relation to the European economies that they are not particularly
vulnerable to negative wealth effects if equity markets plunge. A lack
of US hegemony in capital markets is in this sense helpful for global
If the cure for imbalances in the US and Japan calls for currency
weakness in both countries, the euro-zone will have to become a strong
currency area for as long as it takes for these two countries to
establish a more stable equilibrium. With trade accounting for a
relatively small part of the euro-zone's gdp, and with recovery now
under way, a policy of benign neglect towards the currency is
something the Europeans can safely borrow from the lexicon of US
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