Why Japan Could Use a Stronger Yen


You might think a weaker yen would be just the thing to jumpstart the Japanese economy. But there's a catch.

After years and years of economic doldrums, you'd think a falling yen would be music to Japanese ears.

Think again.

"The JPY’s slide will be welcomed by Japan's exporters," says Neil Mellor, currency strategist at Bank of New York Mellon. But at the same time, "it will serve to amplify the rise in oil prices. Worse, a weaker JPY might actually dilute what is already, a grudging drive for political reform."

Mellor argues that years of administrations resorting to quick economic fixes rather than real reform have left Japan's debt-to-GDP on track to reach 230% by fiscal 2015. What is needed, he says, is to "change course to avert what is essentially a slow-burn fiscal crisis."

Oil prices are another concern. Japan is sharply increasing its oil imports in the wake of its nuclear disaster, and those purchases are only growing more expensive with the yen slipping.

So yes, a cheaper yen is good news for parts of the Japanese economy. But...be careful what you, er, have a yen for.

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