Here are some questions and answers on the yen’s appreciation, the feeble stock market and the effects they’re having on the economy:
What is happening in the global markets?
Heightened concerns about the U.S. economic outlook have triggered a flight of funds from the United States, Europe and emerging economies to the yen, which is regarded as a relatively safe asset. That is why the yen’s appreciation is gathering steam.
Why does the yen attract safety-oriented funds?
Japan’s financial system was less impacted by the so-called Lehman shock than those in the United States and Europe. In addition, Japan has a large surplus in the current balance of payments. Japan’s huge fiscal deficit is not widely seen as a problem for the time being because it is financed mostly by domestic funds.
Is this “Japan-buying”?
Not necessarily. The yen is just a temporary shelter for overseas funds. Stocks are still falling amid active purchases of Japanese government bonds. Once global jitters subside, those funds are likely to return to emerging and other economies with higher growth potential.
What effects does a strong yen have on the economy?
While the economy has made an export-driven recovery, a strong yen hurts Japanese exporters’ overseas profits when repatriated and causes stocks to decline. A strong yen leads to lower prices of imports, but this could contribute to further deflation.
How long is the yen’s appreciation expected to continue?
The United States and Europe are unlikely to tolerate rises in the dollar and the euro as they want to promote exports amid unfavorable domestic economic conditions. The yen’s strength against the dollar is expected to continue for some time.
Will the yen appreciate further to a new all-time high?
A rise above the current record high of ¥79.75 against the dollar set in April 1995 is coming into sight.