American policymakers don't miss an opportunity to browbeat Beijing about the undervalued yuan. But maybe Tokyo needs a talking-to as well. In recent weeks the yen has dropped to a four-year low against the dollar and a record low vs. the euro. If you take into account the different inflation rates in the U.S. and Japan, the Japanese currency is now weaker against the greenback than it was in the mid-'80s, when the issue stoked trade tensions. "People were complaining about the extreme competitiveness of the yen at that time," says Richard Jerram, chief economist at broker Macquarie Securities in Tokyo. "And we're basically in the same situation today."
All the grousing two decades ago led to the 1985 Plaza Accord. Under that deal, Japan and Europe acted in concert to boost their currencies against the dollar. Don't expect such a large-scale reaction this time around. The U.S. has yet to exert much pressure on Japan, though the swooning yen will probably be discussed when finance ministers from the Group of Seven meet in Germany on Feb. 9 and 10. One reason Washington isn't complaining is that Japan, unlike China, isn't manipulating its currency. "The current yen weakness isn't supported by intervention," says Masaaki Kanno, chief economist at jpmorgan Securities (JPM ) in Tokyo.
The feeble yen is yielding an unexpected windfall for Japanese exporters. At a time when Detroit is struggling to turn a profit, a one-yen depreciation in the dollar exchange rate increases the value of Japanese auto exports to the U.S. by $490 million, Shinsei Securities estimates. And game maker Nintendo Co. (NTDOY ) based its projections for this fiscal year on rates of 115 yen per dollar and 143 to the euro. With the currency now trading well above those levels, analysts say Nintendo's bottom line could get a $330 million lift when overseas profits are converted back into yen.
NO SHORTAGE OF SHORTS
Why is the yen in a slump? Japan, after all, is in the midst of its longest expansion since World War II. Economists say the yen's weakness stems from the gulf between interest rates in Japan and those in the U.S. and Europe. The benchmark rate in Japan stands at just 0.25%, compared with 5.25% in the U.S. and 3.5% in the euro zone. The differential has fueled a boom in what is known as the "carry trade," wherein investors borrow yen to buy higher-yield assets overseas. Japanese retail investors are also getting out of the yen and now hold around $210 billion in mutual funds denominated in other currencies, says Kenji Yumoto, chief economist at Japan Research Institute in Tokyo. "These investments are riskier but the numbers keep growing," Yumoto says.
The yen doesn't appear likely to rebound soon. Short yen positions--when investors bet that the currency will weaken--have reached record levels, according to the U.S. Commodity Futures Trading Commission. A sudden realignment is unlikely as long as the Bank of Japan holds rates steady, as it did on Jan. 19. And with soft consumer spending and virtually no inflation, it's anyone's guess when Japan's money men might give the yen a boost.
By Ian Rowley