The Japanese yen is the third most-traded currency on the global forex market, after the US dollar and the euro.
Following a recent flurry of activity on yen-based forex pairs, we take a look at the various market forces that move Japan’s currency – with particular focus on the growing influence of China.
Investors consider the Japanese yen to be something of a safe haven investment during periods of risk-aversion. This effect is amplified when the economic factors causing the flight to less risky assets also have a direct negative impact on other major currencies against which the yen is traded. For example, recent peaks in the yen’s value against the euro have been sparked by risk aversion due to fears over the Greek debt crisis and then magnified by the simultaneous downward pressure on the euro itself.
However, in general terms, investor risk appetite seems to be increasing, with stock markets across the globe showing healthy gains in the first quarter of this year. As such, the yen can not necessarily rely on its ‘safe haven’ status.
Are Asia’s economies overheated?
More fundamental strength for Japan’s currency could come with the tightening of fiscal policy across Asia. A fairly relaxed fiscal attitude by the continent’s central banks has helped key Asian nations achieve impressive rates of economic growth, but has also kept the region’s major currencies – including the yen – pegged back.
Earlier this month Singapore announced 13.1% year-on-year growth in the first quarter of 2010. China also beat analyst growth expectations by revealing an annual growth rate of 11.9% for the first quarter. Equally, the governor of the Bank of Japan sounded a bullish note last week by suggesting that the risk of economic deterioration had diminished and that he expected upbeat growth figures.
This spate of rapid growth in Asian economies has led some analysts to suggest fiscal and monetary policy will now have to be tightened, with Beijing allegedly considering re-valuing the renminbi in the wake of Singapore’s decision to allow its currency to appreciate. If China did increase the value of its pegged currency, the move would most likely see further gains for other Asian currencies, including the yen.
China’s reluctance to re-value
On the other hand, China has managed to achieve its present growth rate while keeping consumer price inflation at a reasonable level of 2.2%. The Chinese government has also asked banks to curb lending by 20% this year to take some heat out of the economy, demonstrating that it still has plenty of ideas up its sleeve that don’t involve re-valuation. Both factors suggest that increasing the value of the yuan is not currently an essential move from an economic perspective.
Beijing’s reticence may be partly political as well as economic; a weaker yuan gives China an advantage in the export market, a reason the current low value rankles with the US.
The net result is that while China refuses to re-value its own currency, other major Asian players will remain disinclined to allow their own currencies to appreciate significantly, thereby cutting their competitiveness in the region. As such we may see the yen lose ground against the euro and dollar until either internal or external pressures force China’s hand on re-valuation.
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The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
* Tax law can be changed or may differ depending on your personal circumstances
Updated: 19/04/10