Yen surge not as strange as it sounds

March 22nd, 2011 by Philip Brasor & Masako Tsubuku

Last week, when all those foreigners bolted the country they got a nice little windfall from the ongoing crisis if they traded in all their hard-earned yen for whatever currency they’d need to get by back home. When markets opened after that nerve-wracking weekend the U.S. dollar, for instance, had lost up to ¥5 since the week before, from 82 to 77. A lot of people were dumbfounded, since such a reaction flies in the face of so-called textbook economics. Why would Japan’s currency get stronger as a result of such a disaster? Wouldn’t people be trying to unload their yen?


The easiest explanation for the surge was the idea of “repatriation.” Japanese companies with investments overseas in other currencies quickly exchanged much of their holdings into yen in order to pay for reconstruction or, in the case of insurance companies, to pay benefits to people and businesses with damage policies. However, as most Japanese economists have pointed out since then, that alone wouldn’t have explained such a pronounced increase in such a short time.

According to the Mainichi Shimbun, the Great Hanshin Earthquake of 1995 created a precedent for the yen surge. Three months after that earthquake destroyed much of Kobe, the yen was the highest against the dollar that it had ever been in history up to that point. At the time, Japan’s GDP was still the envy of the world, and investors with extra cash decided to buy yen, believing that it was sounder than a lot of other investments, especially since Kobe would require lots of money to rebuild. They were basically chasing the repatriated yen. As always, Japan’s exporters panicked. The Bank of Japan intervened to bring the yen down, but they were unsuccessful. It wasn’t until the summer, when the United States and Europe joined in the intervention, that the yen started to drop.

The same thing happened this time, only that repatriation and yen investment happened simultaneously. The response was simultaneous, too. The G7 governments joined the BOJ immediately to bring the yen down, and now it’s almost back to the level it was at before the earthquake, despite the prediction of “Mr. Yen,” former vice-minister for international finance Eisuke Sakakibara, who said that the intervention would have no effect. There seems to be some debate over the wisdom of this policy. On the one hand, the higher yen hurts exporting manufacturers, many of whom have factories up north. Their output has already been heavily damaged and thus Japan’s economy could slide back into recession if the yen remained strong. On the other hand, Japan will need to import supplies for rebuilding and such supplies will be cheaper if the yen remains high. The BOJ has already pumped ¥15 trillion into the money supply so that people and businesses up north have cash, and is also buying more bonds. More rebuilding could kick start an economy that has been stagnating for more than a decade, though in that regard Kobe may not offer an instructive example.

Nationwide, demand went down following the 1995 earthquake, corporate activity remained the same, and the average stock price at the time was double what it is now. The financial writer known as Gucci points out that prefectural production in Hyogo, where Kobe is located, was the same in 1995, about ¥21 trillion, as the combined production of the three prefectures most affected by the tsunami — Iwate, Fukushima and Miyagi — which means the economic effects could be comparable. But the Great Hanshin Earthquake didn’t affect Tokyo the way the March 11 temblor did. Tokyo is Japan’s economic heart, and further blackouts and aftershocks will put a crimp in Japan’s overall recovery.

What the yen surge may really mean is that the world has confidence in the Japanese economy based on its underlying strength (individual savings, bonds), despite its sluggishness over the past 20 years. There’s no doubt that Japan is now entering a period of uncertainty as it tries to recover from three disasters, but it seems the rest of the world thinks it will recover, and that may make all the difference.

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