Currency Craziness: Yen STRENGTHENS As Japan Disaster Grows

By: EW News Desk Team   Date: 18 March 2011

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EW News Desk Team

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EconomyWatch, News Desk Team

 

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18 March 2011

With Japan’s nuclear crisis showing no sign of ending, the yen strengthened against the dollar on Thursday,

compounding that country’s economic worries and raising expectations the central bank will soon have to intervene.

The yen has been creeping upward since the devastating earthquake and tsunami that battered northeastern Japan last Friday.
 
It spiked sharply at 76.53 yen to the dollar in New York as a nuclear official in the United States warned that
 
the situation at the quake-stricken Fukushima Daiichi Nuclear Power Station was more serious than Tokyo has acknowledged.
 
The yen eased off those levels to hover around 79 yen to the dollar.
 
Even at that level, the currency was about 5 percent stronger than it was shortly before the quake. 
 
Demand for yen has been rising in recent days, as Japanese insurers and other financial firms
 
sell their most liquid assets like stocks and commodities
 
to generate cash to use at home for rebuilding efforts.
 
In addition, the yen tends to rise, rather than fall, at times of financial uncertainty,
 
partly because it is seen as a relatively safe asset.
 
The currency’s trend has been accentuated by expectations that Japanese companies, insurers and investors
 
will need to repatriate quickly large amounts of cash from overseas to help pay rebuilding costs.
 
Japanese officials on Thursday said they believed market speculation, rather than actual fund flows, were behind the yen’s ascent.
 
Kaoru Yosano, the Japanese economy minister, said there was no evidence as yet that Japanese life and casualty insurers were selling dollar-denominated assets.
 
“They have ample cash, deposits and other liquid assets,” Bloomberg News quoted him as saying.
 
Whatever the exact drivers, the currency’s strength is highly unwelcome to an economy
 
that is already reeling from the quake’s massive damage and the disruptive power shortfalls that have followed.
 
A stronger yen means Japanese-made goods are more expensive for consumers elsewhere, creating a major headache for export-dependent economy.
 
Japanese stock markets fell Thursday, though the Nikkei 225 index recouped some of its steep morning losses to end down a relatively modest 1.4 percent at 8,962.67 points.
 
The broader Topix even briefly strayed into positive territory before closing 0.8 percent lower.
 
If the situation in Japan and other world markets deteriorates further, global central bankers have several potential options.
 
One initial plan could center around opening lines of credit among major central banks.
 
Similar facilities were opened by some central banks after the terrorist attacks in the United States in 2001 and the financial market contagion in 2008 and 2009.
 
In this case, the Bank of Japan would provide a steady stream of yen to the Federal Reserve and the European Central Bank,
 
ensuring that private banks would have easy access to the Japanese currency.
 
Still, the yen’s sharp climb reinforced expectations that the Japanese central bank,
 
which has been injecting massive amounts of liquidity into the financial system all week,
 
will soon take the step of intervening outright in the foreign exchange markets in a bid to weaken the yen.
 
Given the economic turmoil generated by the quake and nuclear crisis that has followed it,
 
said Thomas Harr, a currency strategist at Standard Chartered in Singapore,
 
“it’s very likely that Japan will get international backing” for any such move, which could come over the next 24 hours.
 
The Bank of Japan last intervened in September, when it sold 2 trillion yen to slow the currency’s appreciation.
 
That was the first such move since 2004, according to the New York Times.
 
However, Harr added, it will be very hard to stem the yen’s rapid rise.
 
“The yen rose about 20 percent after the Kobe earthquake in 1995,” he said.

 


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