Yen perched at risky height

The recent rise of the yen against the U.S. dollar could send the Japanese economy into a second dip, even though Japan’s real gross domestic product has grown for two consecutive quarters. The yen’s sharp rise would hit the profits of export-oriented companies hard. Before the rise, the government declared that the economy was in a state of mild deflation. The yen’s climb may push down the prices of imported goods, benefiting consumers, but this would accelerate deflation, further contracting economic activity.

On Friday, the yen rose to a level against the dollar unseen for 14 years and four months. This followed a report that a Dubai government investment fund had asked creditors for an extension on forthcoming repayments, which caused the Euro to fall amid fears that European banks might suffer losses. Since Japan did not suffer much direct damage from the financial crisis that started in the United States in the autumn of 2008, the yen was bought as a relatively safe asset.

But the yen’s rise against the dollar mainly comes from the virtual zero interest rate in the U.S., and the rather gloomy outlook for the U.S. economy. In early November, the Federal Open Market Committee of the U.S. Federal Reserve indicated that the current low interest rate will be maintained for a long time, likely prompting funds to move to higher-interest currencies and high-yield instruments.

While in the July-September period the U.S.’s GDP showed positive growth for the first time in five quarters, in October the unemployment rate topped 10 percent. More than 120 U.S. banks have collapsed this year. It is also thought that the U.S. is ready to accept a weaker dollar because it wants to increase exports. Japanese Finance Minister Hirohisa Fujii’s repeated statements hinting at his acceptance of a higher yen also may have helped its rise.

If the yen remains at a high level, the condition of Japanese firms will worsen. The government must quickly draw up measures to secure employment and stimulate the economy. It should also act with the U.S. and Europe to stabilize the currency market.