Yen selling accelerates amid spread of coronavirus

25-Feb-2020 Intellasia | JapanNews | 6:02 AM Print This Post

The finance ministers and central bank governors of the Group of 20 advanced and emerging economies confirmed their shared understanding at a recent meeting that wrapped up on Sunday that they would seek to avoid excessive shifts in exchange rates.

However, some are pointing to an abnormal situation involving the yen.

In the past, fears that the global economy would worsen prompted the buying of yen as a safe asset. Currently, however, unexpected selling of the yen is accelerating as a result of the spread of the new coronavirus.

Contingency buying

When uncertainty grows about the future of the global economy, many investors sell relatively high-risk stocks and protect their money in low-risk investments such as national bonds and currencies. Japanese yen, like Japanese bonds and other items, have been considered a safe asset.

Japan is a net creditor nation whose overseas assets significantly exceed its overseas debt. If the need arises it can sell foreign currency, so it is believed that the value of its currency will not fall greatly. This is one reason why “contingency buying of the yen” occurs.

Bank of Japan Gov. Haruhiko Kuroda said Saturday that “the dollar is strengthening against the yen, the euro and various currencies including those in Asia,” and indicated his view that the current fall of the yen and rise of the dollar reflects the strong US economy.

“I don’t think there has been a fundamental change in the exchange-rate market,” Kuroda stressed, rejecting the view that factors such as an economic slowdown and the spread of the new coronavirus were accelerating “Japan selling.”

Sharp drop in trade surplus

As Kuroda indicated, the dollar rose against major currencies from Wednesday to Thursday. However, the percentage drop by the yen was greater than that for the euro and other currencies. Some say it is comparatively easier amid the current atmosphere for the yen to be sold against other currencies, with the exclusion of the dollar, so “contingency yen buying” is less likely to occur.

One reason why is changes in the trade framework.

Japan’s trade surplus, which up until the 2000s had been in the range of around JPY 10 trillion per year, has drastically fallen. Operations at nuclear power plants have been stopped, leading to greater imports of coal for thermal power stations and other goods. As a result Japan’s trade surplus has greatly declined from around 2011 and was about JPY 500 billion in 2019.

If the trade surplus shrinks, that means fewer chances to convert earned foreign currency to yen, making it difficult for the yen to appreciate.

Bad depreciation?

The strength of a currency is said to reflect the economic power of the nation that issues that currency. According to Takahide Kiuchi, an executive economist at Nomura Research Institute, Ltd, “I think the view is spreading overseas that Japan will follow China as a hotbed of the new coronavirus and its economic activity will significantly decline.”

The current depreciation of the yen may be “bad depreciation,” a sign of future decline in Japan’s economic power. In addition to stemming the spread of the new coronavirus, the government will be called on to take steps to improve Japan’s economic strength long-term.


Category: Japan

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