Japan's Efforts to Stem the Yen's Appreciation

by Jacky Yang and Joni Guerrero

The Japanese government has been intervening in the currency market by buying dollars in order to increase demand for dollars and support its value to appreciate against the Japanese yen. The appreciated value of the dollar relative to the yen increases purchasing power of the US dollar, meaning Japanese goods will be cheaper for Americans. Therefore, the US will demand more imports from Japan and enable Japan to have a trade surplus, while the outflow will cause the US to have a trade deficit. Given that Japan is a major exporter, the Japanese do not want the yen to appreciate too much against their trading partners’ currencies. In the past year, Japan’s currency had been steadily appreciating. In August, the yen appreciated to a record high exchange rate of 75.94 yen per dollar.[1] As a result, Japan spent a record 4.5 trillion yen ($58 billion) in currency investment in an effort to weaken the currency.[2] The intervention pushed the exchange rate to above 80 yen per dollar but it quickly lost ground. The appreciating yen had caused Japanese exporters to suffer heavy profit losses. For example, Japanese automaker Mazda posted a 25 billion yen loss in a single quarter due to the appreciation of the yen, which makes exports more expensive for foreigners.[3] Although the Japanese government has intervened in the foreign exchange markets on numerous occasions over the years, many have argued that intervention only has a limited impact on the exchange market because roughly $4 trillion changes hands every day.

Japan has an export driven economy and it is crucial for Japan to keep an eye out for currency appreciation. Too much and sustained appreciation will be unsustainable for the export dependent economy as the stronger currency makes Japanese goods less competitive. So far, Japan has been using intervention in the currency market to stem the yen’s gains. But the problem with intervention is that the effects are most often seen as short term and sometimes ineffective, as seen in the Japanese government’s attempt in August. Another problem is that intervention is costly and it cannot be sustained. Japan’s current holdings of foreign exchange reserves totaled $1.2 trillion in September.[4] This means that Japan has been extensively buying dollars and other currencies at times when the yen appreciates too rapidly. But at some point, Japan may want to decrease its enormous foreign exchange holdings, as it did to rebuild after the earthquake in March, which would weaken the dollar and strengthen the yen.[5] It is unlikely that Japan will be able to repeat its huge scale interventions in the currency market. Plus, at times, the intervention does not come out as expected and the yen continues to appreciate. It comes down to deciding if intervention is the best solution or are there any other ways that could stem the yen’s appreciation? Or even to drive the Japanese economy away from being export-dependent?

Sources

· Deborah Levine, “Japan’s yen new high increases intervention risk - MarketWatch,” Market Watch, n.d., http://www.marketwatch.com/story/japans-yen-new-high-increases-intervention-risk-2011-08-19.

· Hibah Yousuf, “Yen slumps on Japan intervention - Aug. 4, 2011,” CNN Money, n.d., http://money.cnn.com/2011/08/04/markets/yen_intervention/index.htm.

· “Japanese foreign exchange reserves slips - UPI.com,” UPI.com, n.d., http://www.upi.com/Business_News/2011/10/06/Japanese-foreign-exchange-reserves-slips/UPI-97661317958397/.

· Thomson Reuters, “Japan Spent $58.8 Billion on August Yen Intervention - CNBC,” CNBS News, n.d.,

· http://www.cnbc.com/id/44338640/Japan_Spent_58_8_Billion_on_August_Yen_Intervention.

· http://www.fas.org/sgp/crs/row/RL33178.pdf (Accessed October 12, 2011)

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[1] Deborah Levine, “Japan’s yen new high increases intervention risk - MarketWatch,” Market Watch, n.d., http://www.marketwatch.com/story/japans-yen-new-high-increases-intervention-risk-2011-08-19.

[2] Thomson Reuters, “Japan Spent $58.8 Billion on August Yen Intervention - CNBC,” CNBS News, n.d., http://www.cnbc.com/id/44338640/Japan_Spent_58_8_Billion_on_August_Yen_Intervention.

[3] Hibah Yousuf, “Yen slumps on Japan intervention - Aug. 4, 2011,” CNN Money, n.d., http://money.cnn.com/2011/08/04/markets/yen_intervention/index.htm.

[4] “Japanese foreign exchange reserves slips - UPI.com,” UPI.com, n.d., http://www.upi.com/Business_News/2011/10/06/Japanese-foreign-exchange-reserves-slips/UPI-97661317958397/.

[5] http://www.fas.org/sgp/crs/row/RL33178.pdf (Accessed October 12, 2011)