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Yen Continues to Befuddle Japan and the World as the Dollar Trade Fades in Q2 2016

Yen Continues to Befuddle Japan and the World as the Dollar Trade Fades in Q2 2016

Taro Aso, the Finance Minister of Japan, has shown concern regarding the way Japan’s currency, Yen, is rising. Aso is of the opinion that a continued rise in Yen may lead to a monetary fiasco and may cause the Japanese economy to stagnate.

Hong Kong, June 30, 2016 — While the cabinet has been signalling at an intervention, the investors believe that Japan will stay away from any arbitrary intervention.

On Friday, the Japanese currency made an unprecedented climb. It reached 108 Yen per dollar — this is the best the currency has done in the last 17 months. The Yen has performed especially well against the dollar — since the start of the year, it has surged by 12% against the dollar. This can very well be attributed to the fall in US dollar.

The Abenomics plan which was released by the Prime Minister of Japan, Shinzo Abes, aimed to bring down the Yen. A decrease in the value of Japanese currency would have led to an increase in the export and would have accelerated economic growth. However, as is evident, the plan is not working. More recently, the Prime Minister released a statement saying he will take necessary steps to regulate undesirable changes in the currency.

At the start of the year, the Bank of Japan had announced negative interest rates. This was done to bring down Yen and thus, induce investments in the Japanese economy. However, the Yen took a different turn after the US dollar began to fall early this and the Yen has emerged as a safe investment and thus, money managers are investing it.

The Japanese Prime Minister also told reporters on Friday that an undesirable and unpredictable change in any currency is neither desirable nor wanted. For currencies to perform well, they should exhibit stability. And, so is the case with Yen. He also said that excessive surges and unexpected investments disturb the economy. He also confirmed that the cabinet will step in and take necessary steps to ensure the stability of Yen in case the need be. The unprecedented rise in Yen has also hurt share prices in the country. The Nikkei Average has registered a sharp decline. The average went up slightly on Friday. This is especially disturbing since most other Asian markets are showing a downfall. The Japanese Prime Minister, however, did not say anything about the possibility of intervening in the foreign exchange market. Many people are of the opinion that in the wake of the G7 summit which is to be hosted by the Prime Minister the possibility of an intervention is quite unlikely.

Gary Chambers, the Chief Investment Officer and Director of Corporate Trading with Fidea Wealth Management who oversees the management of $3.2 bn of clients funds, said that the negative interest rates strategy employed by Japanese banks isn’t working. The strategy isn’t delivering results it is expected to deliver. As a matter of fact, Chambers also said that negative interest rates are only adding to the rise in the value of Yen. The European Central Bank is another example of how negative interest rates backfire.

The central bank of Europe induced negative interest rates to boost the economy but to no avail. The European economy is still struggling.

The Yen has already reached 108.90 per dollar. This is weighing heavily on the Japanese economy. Japan is facing reduced foreign and domestic demand and is already fighting with the possibility of yet another recession. Nobuteru Ishihara, the Economy Minister of Japan, believes that the increase in Yen has nothing to do with domestic factors. The rise in Yen may have been motivated by speculative moves.

Ishihara also said that he is closely monitoring the foreign exchange markets and the speculative players behind it.

Amidst all thiKazuko Reis, the Jiji news agency, quoted an official from the Finance Ministry as saying that the sudden rise in Yen and the recent movements in the foreign exchange market are totally speculative in nature and were being driven by abstract speculators. As the idea of an imminent recession looms large, Japan continues to stay away from the market. It last made an appearance in the markets in November 2011 with the aim of boosting Yen.

Kazuko Rei
Fidea Wealth Management
Tokyo, Japan

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