G7 to look the other way as yen soars

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All eyes are back on the Group of Seven meeting of finance leaders set for Saturday in Washington.

Emerging as a focal point is whether the finance ministers and central bank governors will declare again that they share Tokyo’s concern over a negative impact of a strong yen on Japan’s economy.

Finance Minister Kiichi Miyazawa, host of the last G7 finance meeting in Tokyo in January, succeeded in talking other participants into agreeing to include the remarks in the joint communique.

This time around, however, with economic recovery gaining momentum in Japan, it is unlikely that a similar statement will emerge.

Come what may, the long-range direction in the yen’s value would remain unchanged — upward.

Past experience shows that none other than Japanese monetary authorities will step in to keep the yen from rising further against other currencies anyway.

Barring unexpected developments, the U.S. and European central banks will find little reason to launch concerted intervention in the currency market and come to the rescue of their currencies.

Worries about the weakness in Japan’s real economy, a major factor behind the yen’s weak showing last year, are no longer at work.

Given the improved picture of the domestic economy, there appears a good chance that the Bank of Japan will end its zero interest rate emergency monetary policy shortly in favor of returning to traditional policy options.

A policy shift in favor of higher interest rates will no doubt put upward pressure on the yen.

Much of the fixed-term postal savings reaching maturity this year and beyond would be switched to other financial products at home, not the overseas financial markets, thus adding to the upward pressure on the yen.

Also working in the yen’s favor are growing expectations of economic recovery in Japan that are helping improve investor confidence in Japanese financial products.

When it comes to growth potential, the Japanese equity market now looks more attractive than the U.S. market.

In short, the yen appears likely to continue its climb through the months ahead and rise past 100 to the dollar in the second half of the year.