In fact, Japan’s economy is very sensitive to exchange rate dynamics and a very strong currency may be very harmful for Japanese companies. For example, it is estimated that for each ¥1 appreciation against the dollar, Toyota loses approximately $350m in annual operating profit. Moreover, each time the currency is appreciating the stock market has been going down. For instance, this year the Nikkei 225, Japan’s most important stock index, lost more than 20% of its value and around 60% of the companies on the exchange's main market are trading at less than their book value.
Although the yen is a freely floating currency, very often in the past, its Ministry of Finance had tried to keep the yen above the $/¥ 100 level. The last intervention was in 2003/2004, when 35 trillion yen were exchanged for more than 350 billion U.S. dollars. Will the Japanese government once again try to prevent the yen from appreciating? In our opinion it is very doubtful. As much as the yen advanced against the dollar, its value against the euro hasn’t changed that much and even though the profitability of the export sector has been declining, a strong currency helps hold down the prices of imports, for such goods as oil and food.