Strong Yen May Tear Down The Japanese Economy

At the end of last month, the Japanese yen reached a series of multi-year highs, hitting a 13½-year high against the dollar, a seven-year peak against the euro and a record high against sterling. So, what is behind this unprecedented overvaluation and how much can it influence the Japanese economy?
Anna Fedec, 2/10/2009 11:49:06 AM

One of the reasons of the recent strength in the Japanese yen is that the currency has been perceived by many investors as a safe-heaven when all major economies are in recession. Indeed, Japan's banks exposure to subprime losses, are not alike the ones in Europe or United States. Moreover, oversees investors, prompted by the intensification of the financial crisis, have started closing carry trade positions and paying off low-yielding, yen denominated loans used for financing of  purchase of riskier assets outside Japan. In addition, as the world's third largest economy is shrinking and the interest rates all over the world are falling, getting closer to low Japanese levels, it is likely that domestic investors will bring yen home, driving the currency even higher.

Unfortunately, for Japanese exporters, the strength of the yen could not have come at a worse time. In fact, exports which have been the main driver of the Japanese economy, fell 35 percent year-over-year in December due to the worldwide slowdown.