Market View

Observations on the Strong Japanese Yen

2011/10/25 Tuesday
fromTTIntern ? Sean Grotkowski
Like many North Americans, I have always assumed that one dollar (in my case, the Canadian dollar) is roughly the equivalent of 100 Japanese yen. This assumption proved to be true the first time I visited Japan in 2007; if something cost 1500 yen, I could expect to be paying around $15, give or take. However, things have changed quite drastically since then as the value of the yen against the dollar has ascended to historically high levels. This first became evident to me when I was looking for a place to live in Japan; having come across a nice-looking guesthouse room for \60,000 per month, I checked the exchange rate to find out exactly what I would be paying in Canadian dollars. I was shocked to discover that instead of paying an amount close to $600, I would actually be paying nearly $800!

Aside from making it expensive for foreigners to visit Japan, the strong yen has produced other undesired effects. The Japanese economy relies heavily on the export of products such as automobiles and electronics, and the surging yen has made it much less profitable to manufacture these goods in Japan. The expensive cost of production caused by the yen’s strength has made it much more difficult for Japanese products to compete with similar products from nations like South Korea. In order to cut down on costs and remain competitive, many companies have started to scale back the production of certain products and shift production to other countries where goods can be manufactured at a competitive price. Unfortunately, as companies adapt to the current conditions in this manner it is inevitable that Japanese jobs will be lost. The Japanese government has already spent trillions of yen in an attempt to weaken the currency and is planning on spending even more, but for the time being the yen’s strength continues to remain at record levels.

Not all of the consequences have been negative, however, and many Japanese are seeing the yen’s strength as an opportunity for personal gain. In recent months, many people have opened foreign currency bank accounts and exchanged their yen for other currencies such as the US dollar, Euro, and even the Brazilian real. Their hope is that the yen’s value will fall against these currencies so that they can exchange the money back into yen at a profit. As of March, the value of money in foreign currency accounts exceeded 5 trillion yen and continues to increase. It should be noted, however, that these investments are risky and have the potential to become losses should the yen’s value continue to increase.

Given the current state of the yen, it is imperative that its value be watched closely and appropriate measures be undertaken as necessary to prevent further damage. For the sake of Japanese companies, people’s investments, and my rent bill, we can only hope to see a weakening of the yen in the coming months.