Japan's strong yen

It may be puzzling that together with the Swiss franc and gold, the Japanese yen has been so strong against the US Dollar even after Japan's earthquake, tsunami, and nuclear disasters in March, the political confusion, and the collapse of Japan's long-term policy for building nuclear plants domestically, as well as exporting the technology.

What is going on?

In the US, the recent recalculation of GDP shows that the recession was deeper, and recovery weaker, than had been assessed at the macroeconomic level — a good reason for a weaker dollar even without default rumors. After issuing the expected signal, the Bank of Japan spent about $12.7 billion to buy well over a trillion yen on August 4. The same day the bank's Policy Board met and unanimously approved retaining the zero-interest rate policy now in place. The board also voted to add 10 trillion yen to its fund for asset purchases for the sake of economic support.

While the officials suggested after the meeting that in the background of their decisions was concern that Japan's consumer price index will fall after it is re-based to 2010, meaning that the desired "escape from deflation" becomes even more remote.

At Pacific Tax Partners, we are not so certain of this. The CPI is an index of prices that are asked, not prices that are paid. With broad changes in consumer behavior such as Internet shopping, use of price-comparison websites such as the very popular kakaku.com, and increased spending on communication services (texting, online gaming, etc.), a major structural change is taking place in spending that may decrease the utility of the CPI. Given the continuing weak employment situation, spending may remain at a low level.

The yen intervention was largely for the sake of the export sector, and through that corporate earnings, support for higher rates of capacity utilization, and support for employment (and perhaps even worker pay). It behooves observers, however, to also look at strong-yen benefits, in terms of trade balances and purchases of imports (including the increased quantities of hydrocarbons for power stations).

The yen lost some of its strength after the intervention, but is it not possible that it will continue to remain high and stymie almost the entire export sector, that is threatening to relocate plants overseas?

Perhaps so. In an Internet contribution, Tetsu Matsuda, of Matsuda Trust and Investment, suggests continuing diversification of China's reserves (lowering the percentage of dollars) is an influential factor and will mean continuing Chinese purchases of yen.

Thus, we now can imagine the interplay of the Chinese and American economies will determine the yen and overall economic health, policies, and activity in Japan.


For more information on customized economic reports and tailored US-Japan tax advice that cuts to the chase, contact the staff economist and experienced tax professionals at Pacific Tax Partners:

Terry Wilson

US Income Tax, IRS Tax Appeals

Terry Wilson

Terry Wilson has 25 years expertise in international financial planning and trade issues as well as US income tax and tax appeals.

He is qualified as an MBA and US CPA, Certified Financial Planner, Certified Internal Auditor, Certified Fraud Examiner, and is a Certified Computing Professional.

He is a member of the American Institute of Certified Public Accountants (AICPA), the Finance Club of Brussels at the Bourse, and the Institute of Internal Auditors.

He can be reached at terry.wilson@pacifictaxpartners.com.

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