Yen will rise amidst strain on Japan economy

The consequences of the Friday earthquake of the East coast of Japan earthquake will compel the yen to strengthen over the medium term, strategists agree. The currency has already appreciated against the US dollar.

  • 14 Mar 2011
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The Japanese yen looks set to gradually strengthen against the US dollar after the full effects and response to Friday’s earthquake become clear, FX strategists broadly agree.

The earthquake, reaching 8.9 on the Richter scale, occurred in the early afternoon Japan time on Friday (March 11). The damage from the resulting tsunamis, fires and power plant explosions are still to be calculated but are widespread and devastating.

Strategists across the board have said the market should expect to see overseas funds move back to Japan to help repair the damage. The event will also lead to an overall decline in risk tolerance, which subsequently leads to net yen purchases due to trade and income balance surplus.

“The strong yen bias could be enhanced by the negative effect on the Japanese economy, reduced tolerance for risk, and the repatriation of funds in the wake of the earthquake,” said FX strategists at Nomura in a research report.

Bad events for Japan historically tend to bolster the yen. J.P Morgan strategists have said that, among other factors, this is because the country is the world’s largest creditor nation, has the world’s largest account surplus, and does not suffer from sizeable hot money inflows.

“An increase in government spending is inevitable...we do not believe that Japanese institutional investors and banks will sell JGBs [Japanese Government Bonds] on concerns over the expanding fiscal deficit, even if the government increases JGB issuance,” said Tohru Sasaki, an FX strategist at J.P. Morgan in Tokyo.

There is chatter that the subsequent repatriation of funds and government funding strategy could place pressure on the yen to breach the US$/JPY mark. The spot price of the currency pair today (March 14) was trading at US$/JPY82, having dipped to 80 briefly.

“While we cannot rule out the possibility of US$/JPY breaking through 80 over the short-term, if this were to happen we think Japanese authorities would respond with intervention and monetary easing,” said Nomura.

The Nikkei 225 benchmark equity index fell 4.5%, while the broader Topix index traded 6% lower in the morning session.

The Bank of Japan has said it will inject ¥7 trillion (US$85.6 billion) into the banking system to stabilise markets. Immediately after the quake, the central bank said it will everything in its power to limit its impact, including providing liquidity to money and banking markets.

  • 14 Mar 2011

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