The G7 intervenedto weaken the Yen last Friday in an attempt to stabilize the Japanese currency’s dramatic rise since the catastrophic earthquake, tsunami, and nuclear disaster. Europe’s central banks, the Federal Reserve and the Bank of Canada followed the Bank of Japan’s Yen sales, pushing it down against the US dollar.
The coordinated action is a welcome move for Japan given the need at this stage to help Japan recover from the last 10 horrible days. Authorities fear that a rapidly rising yen will have an adverse impact on the export-oriented Japanese economy as it copes with its crisis; a legitimate concern to be sure.
The move by the central banks to sell Yen in order to weaken the Japanese currency in the foreign exchange market aims to boost liquidity and support Japan's export trade. Cheaper currency on a relative basis makes goods more affordable to foreign purchasers and tends to drive sales higher.
Coordinated G7 action, coupled with the BOJ's proactive efforts, sends a strong message to the market that there are powerful forces behind a weaker directional move in the Yen; short-term players and speculators betting for a higher yen — beware. Coordinated action is good news for companies like Nissan and Sony that do well when Yen exchange rates are weaker.
In general, the investment community tends to be skeptical of the efficacy of central bank interventions. Many believe that such actions in the currency market tend to only have a short-term impact.
However, in this case, there is a chance that intervention might have a longer-term impact.
The Bank of Japan is not just selling yen, it is printing yen. Money supply is increased because the funds used to sell Yen are also raised by printing money, not just the buying or selling of government bonds.
Of course, efforts to weaken the yen may be limited if fundamentals work against these efforts.
A stronger Yen exist now because Japan is selling foreign assets and bringing the money home to pay for rebuilding. Repatriation activity is a major obstacle as central banks attempt to weaken the Japanese currency.
- There are many uncertainties for Japan and the economy:
- How will exports be impacted by currency?
- Will Japan continue to gather asset from offshore?
- What tangible steps are the G7 nations contemplating?
- Is deflation finally off the table?
For investors these questions have real portfolio consequences. It's our view that despite the gloomy predictions, Japan will recover and that the second half of this year will see a bump in economic growth as rebuilding hits full strength.
Yes, we remain concerned about 200% of GDP deficits but that issue is a longer term concern. For now look for Japan to bounce back. Warren Buffet of Berkshire Hathaway could very well be right; this may be a buying opportunity for investors in Japan.
Michael A. Yoshikami, Ph.D., CFP®, is CEO, Founder, and Chairman of YCMNET’s Investment Committee at YCMNET Advisors, Inc., a registered investment advisory firm. He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at email@example.com