Global economies are intertwined and when two or more countries have issues associated to their currencies markets can unravel quickly. Recently, the Japanese yen has surged which has created angst between Tokyo and Washington. At the heart of the matter is the exchange rate between the two countries. There has been a great deal of concern within Japanese companies that they will not be able to maintain their desired level of exports and that profits will continue to fall. These actions have put policy makers in a position to devalue the yen. Within the United States companies are concerned that if the yen is devalued that job losses will spike and factories will close.
United States economists and policy makers are concerned that a yen intervention could conceivably create a chain reaction causing currency depreciations around the world. These currency depreciations could easily affect countries such as China which has the second largest economy in the world.
The Japanese economy has not fared well over the last several decades. The Bank of Japan (BOJ) has attempted to stimulate the Japanese economy with negative interest rates. Between 1972 and 2016 the average interest rate within Japan has been 2.99 percent. The numbers have varied significantly from a rate of 9 percent in December 1973 to a record low of -0.10 in January of 2016. In April, the Bank of Japan remained consistent with past monetary policy and decided to leave its present negative interest rate at 0.1 percent. In addition, the BOJ stated that it will adopt a JPY300 billion program whose purpose is aimed at assisting bank operations which have been decimated by earthquakes. Also, the Bank of Japan’s Governor Haruhiko Kuroda indicated to reporters during a press conference that the central bank remained committed to targeting its two percent inflation target in roughly two years.
Again, due to the weakness in the Japanese economy the government is looking at all of its options to stimulate the economy. There has been recent discussion that the Bank of Japan along with the finance ministry which has threatened to buy foreign currencies and sell yen to weaken the Japanese currency. Major automobile manufacturers such as Ford Motor Company have recently exited the Japanese market due to their monetary policies. Along with Ford Motor Company leaders other industry officials are sounding off on yen intervention. Gerard International, the president of the United Steelworkers union recently stated that “it’s no secret that currency manipulation has played a major factor in the ability of China and Japan to put their products in our market and put our companies and industrial workers in a very precarious position”
The United States dollar has surged over the last two years against several currencies which has slowed US growth because it is more expensive to our international buyers. Along with an uneven sluggish recovery, both China as well as Japan’s currency policies has stirred anti-trade sentiment within the United States presidential campaigns.
When looking at the present situations taking place within Japan and the United States there could be enormous trading opportunities. Today, placing a trade on USD/Yen the trader would hope that the dollar would continue to strengthen against the yen. However, there is no guarantee that this will happen.
In closing, there is no guarantee that government officials will act and devalue the Japanese yen. Government leaders along with industry representatives are clearly not happy with the idea of a weakening yen versus the US dollar which will invariably threaten the growth of the United States economy.