What’s the Deal with the High Yen?

Japanese yen

Photo by 7D-Kenny on Flickr

Ever since returning from Japan last May, the yen has been sky-rocketing in comparison to the dollar. With all the trouble Japan has been having with tourism and the nuclear worries over the Fukushima Power Plant, it’s been hard to wrap my head around why this is happening.

The Rising Yen

While we were in Japan during the months of April and May, the exchange rate for dollars to yen was pretty sweet. There was times where a Canadian dollar would buy you 90 yen. Compare that to now where it won’t get you more than about 76 yen. This drop off started shortly after the earthquake and continued to plummet till now. And while there certainly has been plenty of global economic instability since then, the Canada economy has weathered the storm fairly well, and it’s difficult to explain the disparity in the currencies.

Strong yen towers over other currencies

So what’s the deal?

I’m not an economist and math makes me break out in a full body rash, so I’ll leave the explaining up to a well written article I found by The Japanese Blog.

Here’s the skinny:

On March 11th, in the aftermath of the devastating Tōhoku earthquake, the yen rose to 76.25 versus the dollar—the highest it had been since World War II. The spike was brought about by currency traders, not tectonic shifts. They speculated that following the disaster, Japanese investors would repatriate their money from overseas and invest it in rebuilding Japan. In other words, they would pull their money out of other countries and put it back in Japan. And that’s exactly what did happen.

So basically, money investors knew that the Japanese would be running scared after the earthquake and their nuclear troubles. To the Japanese people, it was time to circle the wagons and start pulling their money back into Japan. And that’s exactly what they did. Money investors have been ridding this influx of money coming into Japan by piggybacking on it and investing their money as well. This is one reason the yen looked like a good investment. Funny how a natural disaster can be good for the strength of your money, hey?

The Japanese people have also had a long history of being big time money savers. The Japanese have historically saved anywhere from 15% to the current 3% of their household income. Compare this to the average Canadian and American saving of anywhere from 3% to 0%. Interestingly, the average Greek household was saving -7.3% of their income back in 2007. Any wonder why they’re having such a financial crisis now?

woman holding yen

So when the Japanese Government put the call out for aid, the people responded by using their savings to buy up Government Bonds. Again, money is kept in Japan which translates into the stronger yen.

Now for the non-Japanese. Another reason for the strong yen in recent years is what’s known as the ‘carry trade’. This is when investors buy currencies with low interest rates and use them to buy currencies with high interest rates. They then get the money from the difference. Many global investors bought yen years ago to make money this way. But when recession hit the world economy, this became risky and they paid it back. In order to pay the money back, they needed to buy yen, and up it goes.

Also, due to Japan’s export-centric economy the yen can weather the economic storms a bit better than an import-based economy. Of course, a strong yen also makes their products more expensive to sell. So while a strong yen helps at home, the overall economy would be benefited if starts to level off.

How long will the Yen stay high?

This is the million dollar question that all travellers to Japan would like to know. How long is the dollar going to be weak against the yen?

The good and bad news is that the strong yen has already started to hurt the Japanese economy. Toyota alone felt a net drop of 32% in their exports during July to September.

Japanese manufacturing sentiment slid in November for the second straight month on a raft of negative factors such as the yen’s rise to record highs, softening demand from emerging markets and the impact of floods in Thailand. – Reuters

This means the Japanese will be looking closely at ways to level the yen off. The longer the yen remains stubbornly-high the more the Japanese economy will hurt. So it makes good sense for the yen to drop. Of course, we don’t know when or how long that will take. So in the meantime, travellers will be paying a bit more for every bento box and the Japanese will learn to live with a strong yen.

2 Responses to “What’s the Deal with the High Yen?”

  1. Jon @ vodkitchen  on January 27th, 2012

    Unfortunately it is now January, almost February, and the dollar still only buys 76 yen today. We are going back in march and really bummed about the values… Argh.

  2. Travis  on January 28th, 2012

    Yeah, the high yen is a real downer.

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