The butterfly effect triggered by Greek voters left its mark on Japan’s economy last week as stocks took their sharpest drop of the year and the yen soared against the dollar amid deepening concern over the eurozone’s debt crisis.
The wild ride may not end until the next Greek election on June 17, some warn.
“There is such a sense of uncertainty in the air that it is a very difficult situation” for the economy, said Tsuyoshi Ueno, a senior economist at NLI Research Institute.
“Until the election takes place no one is going to be willing to take any risks,” he added. Currency traders acted quickly to avoid losses and scrambled for a safe haven, such as the yen.
Considered a bit less risky than the greenback and euro, the yen dipped below 80 to the dollar. Stockholders looking to avoid fluctuations took sanctuary in 10-year Japanese government bonds, whose yields fell to their lowest since 2003 last week at 0.815 percent.
Finance Minister Jun Azumi was quick to respond to the situation at a news conference Friday.
The yen’s rise “means that it is relatively a safe asset,” Azumi said. “That isn’t a bad thing.”
But Azumi also said there are signs of “speculative moves” in the foreign-exchange market.
“If this mindset continues and begins to have an impact on the real economy, it is in no way a plus factor for the global economy or for Japan’s economy,” Azumi said.
While Greece was at the top of the agenda as world leaders gathered for the Group of Eight summit in the United States over the weekend, Prime Minister Yoshihiko Noda, who has said the euro’s troubles are the biggest risk for Japan’s economy, spoke separately with France’s newly elected president, Francois Hollande.
But despite agreeing to work together to avoid deepening the crisis in the euro region, nothing tangible came out of the meetings.
Meanwhile, the Bank of Japan, which is scheduled to hold a two-day Policy Board meeting from Tuesday, is not expected to further ease monetary policy. The central bank boosted the size of its asset purchase program by ¥5 trillion last month. Lacking effective policies to counter the economic uncertainty, Japan will be in limbo for nearly a month until Greek voters decide whether to accept the terms of the EU-IMF bailout or oppose austerity and exit the eurozone.
NLI’s Ueno pointed out that if Greece leaves the eurozone, the Japanese economy would likely suffer. A rising yen and depressed stock market will weigh on consumers and could cool spending.
Japanese trade, which is already experiencing historic losses from the strong yen and reliance on imported fuel, may also worsen. Trade with Europe, already on the decline, could become disastrous if Japanese exporters have to compete with rivals in Europe benefiting from a favorable exchange rate, Ueno explained.
Tourism in Japan, which is slowly recovering from the Great East Japan Earthquake, could be hit hard as well.
If the euro crisis deepens, the currencies of emerging economies will likely drop against the yen as well. This will not only have an impact on the number of European tourists visiting Japan, but on Asian tourist numbers as well, Ueno said.
Leaving the eurozone “won’t be easy” for Greece, Azumi said Friday, in something of an appeal to voters there.
“Considering what lies ahead after leaving makes it clear that it is important to pursue measures to reform their finances, although it may be a very difficult option for the Greek people,” he said.