Thursday, January 15, 2009

Why Japan Hasn't Stopped the Yen's Rise

Why Japan Hasnt Stopped the Yens Rise

When the yen surged to historic highs against the dollar, euro, and other currencies in December, retail investors formed lines at banks and brokerages, recognizing that there were currency bargains in the offing. After all, during 2008 the buying power of the yen surged 19% against the dollar. Against the euro and the pound the Japanese currency gained even more, rising 22% and 40%, respectively. Today, with the yen still hovering around 13-year highs against the dollar and Japan's economy sinking deeper into recession, how soon will it be until the Japanese government, albeit for different reasons, also starts selling yen?

For sure, the strength of the currency, and the damage it is causing to Japan's export-reliant economy, is raising concern in Tokyo. After weakening slightly in the first few days of 2009, it is again close to the worrying highs of a month ago; at 89 to the dollar at the close of Tokyo trading on Jan. 14. A day earlier, amid rumors that Sony (SNE) and Toshiba (6502.T) may incur operating losses during the current fiscal year, Fujio Mitarai, chairman of Nippon Keidanren, Japan's most powerful business lobby, for the first time said Japan's Ministry of Finance may have to step in. "If this situation continues for a long time, I want [the government] to intervene," Mitarai, who is also chairman of Canon (CAJ), told reporters in Tokyo. "The current rise in the yen across the board is not good for the Japanese economy."

Weaker Against Korean Rivals

The strong yen is adding to Japan's economic woes at a time when global demand for its cars, electronics goods, and other products is slumping. At Toyota (TM), which is projecting its first operating loss since 1938, a one-yen strengthening of the currency against the dollar costs $450 million in lost operating earnings. At Honda (HMC), a similar one-yen appreciation costs the company about $200 million. On Nov. 6, Honda CEO Takeo Fukui said the Japanese government should intervene to weaken the yen. "Foreign exchange has to stabilize," Fukui told reporters at the launch of new a minicar for the Japanese market.

While the impact is less spectacular at electronics makers, the strong yen is cited as a reason Sony and Toshiba may miss profit forecasts. There are also concerns that electronics companies' longer-term competitiveness with Korean rivals is being undermined. In the last year, the Korean won sank 40% against the yen, handing a cost advantage to Korean companies such as Samsung Electronics and LG Electronics.

What's more, it's not just the dollar. Today, the yen is stronger against the euro, pound, and other currencies. According to the Bank of Japan, the yen reached a nominal trade-weighted record in December. The yen's real trade exchange rate, which considers changes in price levels across countries, is at its highest level since November 2001.

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