It is a hard fact that the yen has been the best-performing major currency this year, with a rise of 6% from the beginning of 2018. The Japanese currency has experienced some set-backs in occurrence of the US elections from which however it has totally recovered, reaching in mid-February the peak value of ¥105.55 against the dollar from a starting value of ¥113 per dollar at the beginning of 2018.
Surely, the cause of this rise must be attributed to the intrinsic weakness of the dollar itself. Without digging too deep, the US currency has faced a period of downward pressure coming from many stands, such as Trump’s political agenda and the deterioration of the U.S. current and fiscal accounts. Moreover, it is not so surprising that, despite the Fed tight monetary policy and the actual hike of interest rates, the dollar is not appreciating, since it has already strengthened in advance through the expectations mechanism, hence the actual reaction to the begin of the implementation of the monetary stance has been mildly noticed. Finally, the downward trend is believed to be persistent at least for the next year.
On the other hand, it is logical to inquire the current strength of the yen from an endogenous standpoint as well. The phenomenon of the currency performing so well despite the lack of action of the Bank of Japan may seem odd. The latter has been acting in the opposite direction with respect to the other major central banks and against the expectations of the market, declaring that an interest rate hike is not going to happen in the near future and that the preferred approach is to keep rates low in order to favor economic growth. An interest rate hike usually spurs demand of the national currency, thus causing appreciation. Anyway, the lack of monetary tightness has not prevented the currency from increasing in value on its own. Even the election of Haruhiko Kuroda as governor of the BoJ and its up-front loose monetary stand has not gotten in the way of the rising yen. Conversely, Taro Aso, Japan’s Finance minister, has declared that the yen does not need any intervention, as its fluctuations are neither abrupt nor source of concern. The minister has also commented on the repercussions on the Japanese economy, primarily in terms of exports, declaring its absence of concern on the appreciation trend. This is of course a good sign for the market, which may determine further upward pressure on the yen.
But then, is the dollar weakness the only reason behind the yen appreciation? A group of experts believes part of the reason stands in the role of Japan as the world’s largest net creditor. Behind it, there is the idea that the index of attractiveness towards one nation’s currency with respect to another is not the monetary base anymore but instead the current account imbalances and the reason of this change is found in the already-mentioned deteriorating U.S. fiscal account. If that turned out to be true, it would mean that the pressure on the yen is only at its initial phase.
Anyway, the yen has settled in the last day of February towards a more comfortable value of ¥106.4 per dollar. The attention is now on what March will bring: a continued appreciation below the break-through value of ¥107 per dollar may signal that the dollar weakness is indeed systemic, changing the perspective on the two major currencies relationship and on its whole economic meaning.
As for fundamentals, they seem to indicate that the yen is still undervalued and the research of the Peterson Institute (Washington) shows ¥101 per dollar as the equilibrium exchange rate that is going to be reached.
Anyway, it seems only reasonable to believe that the yen will take on a more important role for the period to come.
Adriana Messina
Surely, the cause of this rise must be attributed to the intrinsic weakness of the dollar itself. Without digging too deep, the US currency has faced a period of downward pressure coming from many stands, such as Trump’s political agenda and the deterioration of the U.S. current and fiscal accounts. Moreover, it is not so surprising that, despite the Fed tight monetary policy and the actual hike of interest rates, the dollar is not appreciating, since it has already strengthened in advance through the expectations mechanism, hence the actual reaction to the begin of the implementation of the monetary stance has been mildly noticed. Finally, the downward trend is believed to be persistent at least for the next year.
On the other hand, it is logical to inquire the current strength of the yen from an endogenous standpoint as well. The phenomenon of the currency performing so well despite the lack of action of the Bank of Japan may seem odd. The latter has been acting in the opposite direction with respect to the other major central banks and against the expectations of the market, declaring that an interest rate hike is not going to happen in the near future and that the preferred approach is to keep rates low in order to favor economic growth. An interest rate hike usually spurs demand of the national currency, thus causing appreciation. Anyway, the lack of monetary tightness has not prevented the currency from increasing in value on its own. Even the election of Haruhiko Kuroda as governor of the BoJ and its up-front loose monetary stand has not gotten in the way of the rising yen. Conversely, Taro Aso, Japan’s Finance minister, has declared that the yen does not need any intervention, as its fluctuations are neither abrupt nor source of concern. The minister has also commented on the repercussions on the Japanese economy, primarily in terms of exports, declaring its absence of concern on the appreciation trend. This is of course a good sign for the market, which may determine further upward pressure on the yen.
But then, is the dollar weakness the only reason behind the yen appreciation? A group of experts believes part of the reason stands in the role of Japan as the world’s largest net creditor. Behind it, there is the idea that the index of attractiveness towards one nation’s currency with respect to another is not the monetary base anymore but instead the current account imbalances and the reason of this change is found in the already-mentioned deteriorating U.S. fiscal account. If that turned out to be true, it would mean that the pressure on the yen is only at its initial phase.
Anyway, the yen has settled in the last day of February towards a more comfortable value of ¥106.4 per dollar. The attention is now on what March will bring: a continued appreciation below the break-through value of ¥107 per dollar may signal that the dollar weakness is indeed systemic, changing the perspective on the two major currencies relationship and on its whole economic meaning.
As for fundamentals, they seem to indicate that the yen is still undervalued and the research of the Peterson Institute (Washington) shows ¥101 per dollar as the equilibrium exchange rate that is going to be reached.
Anyway, it seems only reasonable to believe that the yen will take on a more important role for the period to come.
Adriana Messina