“You have to feel some sympathy” for former Japanese finance minister Shoichi Nakagawa, says David Wighton in The Times. Nakagawa, who resigned this week amid accusations that he was drunk at a G7 press conference, could be forgiven “the odd snifter” given Japan’s latest grim data. The economy shrank at an annualised rate of almost 13% in the fourth quarter, the steepest decline since the early 1970s. A weak economy typically means a weak currency, but in Japan it’s a different story. After the GDP data the yen didn’t budge against the dollar, against which it has gained a fifth since January 2008; against the euro it is up by around 30% since last summer.
The yen has benefited from Japan’s current-account surplus and the gradual convergence of global interest rates with Japanese levels. More importantly, it also benefits from global risk aversion. During the boom, investors borrowed low-yielding yen, sold them, and invested the money in higher-yielding, risky assets. As the crunch kicked in, they unwound these so-called carry trades, buying back the yen in the process. The yen has thus become a safe-haven currency.
This story of risk aversion and carry-trade unwinding looks far from over. Foreigners have unwound yen carry trades “with a vengeance” since the summer, says The Economist, and the focus is now on Japanese households and firms bringing back money from overseas, where returns and yields have fallen. Firms and households are feeling the pinch in the domestic downturn, another incentive to bring money home. Lex in the FT notes that the private sector still holds $1.7trn of foreign assets, so there is ample scope for more repatriation. Moreover, next month is the end of the fiscal year, “traditionally a time to cover positions” and repatriate money.
There has been talk of Bank of Japan intervention to hold the currency down, but it’s hardly a done deal. Japan would be loath to risk starting a round of competitive devaluations among industrialised countries, says The Economist. What’s more, the Bank would have an uphill struggle against the repatriation flows and “unremitting bouts of risk aversion” that bolster the yen, says Morgan Stanley. Morgan Stanley also reckons intervention is likely to slow, rather than reverse, the yen rally. They see scope for a rise to 80 to the dollar, from around 90 now, by the end of March.