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Tuesday, Sep. 13, 2011

FYI

THE YEN

Despite mounting debt, yen still a safe haven


Staff writer

The yen climbed to and has remained at a historic high since the March 11 earthquake and tsunami disaster. On Aug. 19 it hit a postwar high of 75.95 to the dollar, an event that has led the government to intervene in the foreign exchange market twice.

This is a sign that despite an ever-growing government debt, which has now surpassed ¥900 trillion, the currency remains a safe haven for many foreign exchange investors.

Here are some questions and answers on the yen and its history:

When was the yen adopted, and how has its value fluctuated in the postwar period?

The Meiji government replaced Tokugawa coinage with the new currency act signed in May 1871 and the monetary unit was formally adopted. At that time the value of ¥1 was set at 1,500 mg of gold. The same weight of gold is being traded at approximately ¥7,000 today.

Under the 1949 Bretton Woods system, the U.S. fixed the yen at 360 per dollar, and it remained at that level until 1971.

But it was that year that Washington, suffering from trade deficits and an outflow of gold abroad, abandoned the gold standard, which foreign currencies were linked to. Japanese exports were also deemed as being too cheap on the international market, so the U.S. devalued the dollar that year and the exchange rate dropped to ¥308.

The new fixed-rate scheme lasted only two years, until the introduction of a floating exchange rate system, in which the value of the currency fluctuates according to movements on the foreign exchange market.

What was the Plaza Accord?

On Sept. 22, 1985, the Group of Five, consisting of Japan, the U.S., France, West Germany and the U.K., agreed to depreciate the dollar's value against the yen and the German mark.

This accord, named after the Plaza Hotel in New York where the meeting took place, caused the yen's value to nosedive, from approximately 250 per $1 to less than 160 in less than two years.

Some pundits say this move was at the root of both the bubble economy and the subsequent recession in Japan.

Because the Japanese economy is dependent on exports, the Bank of Japan introduced a low interest rate out of fear that a strong yen would cause a major recession following the Plaza deal.

That encouraged investors to actively purchase domestic assets. Meanwhile, the stronger yen also made it easier for Japanese companies to make investments overseas, as exemplified by the October 1989 purchase of New York's Rockefeller Center for ¥220 billion by the Mitsubishi group.

The excessive investments came to an end in 1990 when the bubble burst.

Why is the yen seeing a historic surge this year?

The yen skyrocketed right after the earthquake and tsunami. That the currency is being favored under such circumstances seems strange, but some explain that this is because Japanese companies, suddenly in need of large volumes of yen to pay for reconstruction costs or for higher insurance premiums, quickly sold their assets abroad and converted the proceeds into yen.

Six months after the earthquake the yen is surging again to a historic high. This time, pundits point to fears over sovereign debt problems in Europe and a possible double-dip recession in the United States, both of which are still suffering in the wake of the 2008 financial crisis.

Compared with their currencies, the yen is considered a "safe haven" for investors, at least for now.

Why is the yen considered safe, even when the government is holding such an enormous amount of debt?

Kenji Imamiya, a professor emeritus of Chuo University, explains that investors tend to "prioritize stability" and that the "Japanese yen was considered relatively safe when compared to the U.S. dollar and the euro" at a time when the global economy is showing signs of slowing down.

Imamiya, who has authored several books on finance, including "Hendo Kawase Seido to Kokusai Tsuuka" ("Floating Exchange Rate System and the World Currencies"), said that while the Japanese government has a colossal debt, its bonds are mostly purchased domestically and the damage from the so-called Lehman shock was not as bad in Japan as it was in the West.

"The yen being purchased doesn't necessarily mean Japan's economy is looking sound. It is being chosen just as a temporary retreat" by investors, Imamiya said.

So, is it better for Japan's economy when the currency is weak?

A weak yen has many merits, but advantages also exist when it is strong.

A stronger yen means Japan can import overseas products at a cheaper rate, and Japanese companies are able to buy up foreign companies at a discounted price to expand their business.

In fact, the Japanese government has written up measures to take advantage of the strong yen, including a $100 billion loan program revealed last month that is designed to extend loans to domestic firms so they can make overseas investments. Another perk of a stronger yen is being able to travel overseas more cheaply.

Meanwhile, a weaker yen translates into increased competitiveness for Japanese companies overseas, since they can provide products and services there cheaper and still reap a healthy profit in yen when they repatriate their profits from abroad.

But it will cost more for Japan to obtain essential goods from overseas, such as oil, gas and other energy resources.

Will the yen remain strong for a while?

Finance expert Imamiya said it will, although it is hard to predict how the currency market will react to several key meetings on the global economy slated for this month and next.

"But until fears of a global economic crisis are gone, the Japanese yen is likely to be traded at least at the current level," Imamiya explained. But he added that the failure to swiftly reconstruct the disaster-hit areas in the Tohoku region or some major gaffe on fiscal policy by Prime Minister Yoshihiko Noda could make a quick impact and tempt investors to retreat from the safety of the yen.

By the way, who are the people featured on Japanese bank notes?

Bacteriologist Hideyo Noguchi (1876-1928), who hailed from Fukushima Prefecture, can be seen on the ¥1,000 bill, while a portrait of female poet Ichiyo Higuchi (1872-1896) graces the ¥5,000 bill.

The highest denomination, ¥10,000, bears a portrait of Yukichi Fukuzawa (1835-1901), the founder of Keio University who is considered a key figure in building modern-day Japan.

The ¥2,000 bill, which was first issued in 2000 to commemorate the millennium and the Group of Eight meeting held in Okinawa, does not bear any portraits of a person. It instead shows a scene from the 11th-century classic "The Tale of Genji."

The last time Japanese bank notes were redesigned was in 2004, something that happens approximately every two decades.

The Weekly FYI appears Tuesdays. Readers are encouraged to send ideas, questions and opinions to hodobu@japantimes.co.jp


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