Now and Yen

August 26, 2010

Official concern about yen strength is palpable and mounting by the day.  Not since the last intervention in March 2004 has the possibility of government sales of yen been considered so carefully and so publicly.  This week the yen touched a record high of 105.44 per euro, and the currency’s high of 83.59 per dollar was the strongest since 1995.  This note compares the recent path taken by the yen to the one followed in 1995.  They are quite different.

In 1995, the yen took the route of an upside-down “V”.  It’s average dollar value in full-1994 of 102.21 was not very much weaker than the mean of 98.89 in the final quarter of that year, nor the monthly averages of 99.79 and 98.29 in January and February of 1995.  But Japan’s currency strengthened sharply in March to average 90.68 and recorded an all-time high of 79.85 on April 19th.  Dollar/yen posted similar averages of 83.75 in April, 85.10 in May, and 84.62 in June but then beat a hasty retreat.  The successive monthly means during the summer quarter of 1995 were 87.39 in July, 94.61 in August and 100.66 in September.  By that last month of the third quarter, it was trading not far from its full-1994 average level.  It got even closer in the fourth quarter, averaging 101.49, and the mean value of 108.79 in 1996 put the yen 13.5% below its 1995 mean of 94.05 and 6.0% lower than its 1994 average.  Moreover, the main currency market theme during the first half of 1995 was dollar weakness, not yen strength, since other major currencies were also strengthening impressively against the dollar.  In the entire history of the Deutsche mark, Germany’s currency never got stronger against the dollar than on March 8, 1995 when such touched 1.3450 per USD.  Yen per mark averaged 64.05 in 4Q94, 64.93 in 1Q95, 60.45 in 2Q95, 65.71 in 3Q95 and 71.28 in 4Q95.  Thus, the yen in the final quarter of 1995 averaged 10% less against the mark than a year earlier.

The yen’s sharp decline in the second half of 1995 was facilitated by central bank real and verbal intervention, not only by Japanese authorities but in coordination with other central banks.  It was the time that former U.S. Secretary of the Treasury Robert Rubin introduced the phrase, “a strong dollar is in the best interest of the United States” into the policy lexicon. Although Japan lapsed into recession a couple of times during the lost decade of the 1990s, the rising yen did not cause one of those episodes.  Japan posted improving calendar year growth of 0.9% in 1994, 1.9% in 1995 and 2.6% in 1996.  Annualized quarter-on-quarter growth surpassed 2.9% in six of eight quarters from 3Q94 to 2Q96, including a sequence of 3.7%, 3.3% and 3.8% in the first three quarters of 1995.

Things are different these days.  The yen is grinding its way north and has been doing so since late 2007.  Never before has the yen been stronger than 100 per dollar for such an extended uninterrupted period.  Moreover and unlike 1995, this is not a period of dollar weakness.  From a low of 170.0 per euro on July 23, 2008, the yen had soared 25.8% versus the common European currency to 135.13 by August 26, 2009 and then appreciated another 28.2% to 105.44 per euro this past Monday.  That was a cumulative 61.2% leap in just 25 months.  1995 preceded the Asian debt crisis, and chronic deflation had not yet enveloped Japan.  The global economy went through a wrenching experience in 2008 and 2009, Japan not excepted.  The economic outlook for advanced economies presently looks more precarious than in the mid-1990s.  Growth in the coming twelve months will mostly be softer than over the past year, and the outlook is fraught with unusually high uncertainty.  Yen appreciation erodes the competitiveness and earnings power of Japanese exporters, and it aggravates domestic deflation.

The table below documents quarterly averages of dollar/yen in 2007-2009, and a second table breaks down the yen’s path this year against the dollar into monthly increments.

JPY per USD 2007 2008 2009
1st Quarter 119.41 105.24 93.64
2nd Quarter 118.93 104.57 97.42
3rd Quarter 117.90 107.55 93.58
4th Quarter 113.19 96.01 89.86
2010 Yen Per Dollar
January 91.24
February 90.23
March 90.73
April 93.58
May 92.10
June 90.80
July 86.48
August thru 08/26 85.45


From a calendar-year standpoint, the sharpest recent advance of the yen was a 14.0% gain from 117.79 per dollar in 2007 to 103.32 in 2008.  That was followed by another 10.4% appreciation to 93.61 in 2009.  In contrast, the yen’s average value thus far in 2010 remains above 90, albeit just barely at 90.13, and that mean is just 3.9% stronger than the average value in full-2009.  The justification for intervention now, if such comes, cannot be defended credibly by the shared G-7 condition of disorderly market volatility.  The rationale this time would be the level of currency values, whether or not officials actually admit to that.  Japan’s colleagues are unlikely to accede to such terms.  Party leadership elections in Japan’s ruling DPJ complicate matters and escalate the urgency attached to the issue from a domestic standpoint.  Fed Chairman Bernanke and BOJ Governor Shirakawa have an opportunity to talk at the Jackson Hole Symposium.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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