The Surprising Strength of the Japanese Yen

It’s at record strength vs. the dollar as investors flee global turmoil

Carlos Ghosn, Nissan Motor’s chief executive officer, said on Oct. 7 that Japan needs to curb gains in its currency or tempt companies like his to relocate factories overseas. Two weeks later, the yen powered to a new postwar record of 75.8 per dollar as Europe’s debt crisis drove demand for so-called safe haven assets.

Japan’s government bonds and currency typically gain in times of financial strife. The country’s August current account surplus of ¥408 billion ($5.4 billion) and deep domestic savings pool mean it doesn’t need the foreign capital that propped up Greece and Portugal before those nations sought bailouts. While Japan’s bonds pay the lowest rates in the world, when translated into dollars they become world beaters. For those who used dollars to buy Japanese government bonds (JGBs) total returns have reached 8.8 percent this year, passing the average 7.2 percent dollar-based returns on global sovereign debt, Bank of America Merrill Lynch data show.

Akio Kato, team leader for Japanese debt at Kokusai Asset Management, is one of many Japanese investors keeping more money in Japan, a factor that may accelerate gains in the yen. Kokusai’s Global Sovereign Open, Japan’s biggest mutual fund, with $27 billion under management, said in September that it boosted yen assets and cut holdings of Italian debt. “Behind demand for Japan’s bonds is not their attractiveness as financial products but the sense that Japan is the least volatile market,” says Kokusai. Investors abroad have bought ¥20.9 trillion of Japanese securities so far in 2011, more than double the amount a year ago.

The superyen is making it easier for Japanese companies to pick up overseas assets on the cheap. Brewers Kirin and Asahi Group have bought companies in Brazil and New Zealand as a hedge against Japan’s shrinking population. Nissan’s Ghosn, in contrast, says the yen, by jacking up the price of exports, is a bigger economic problem than the March earthquake. Rather than contributing to growth, the export sector shaved 0.8 percent off gross domestic product in the second quarter, and the Japanese Cabinet downgraded its assessment of the economy this month for the first time since April. Japan’s economy will probably contract 0.5 percent this year.

Exporters may not get any relief if Eisuke Sakakibara, the former currency official dubbed Mr. Yen, is right. At a recent Bloomberg conference, Sakakibara said the yen may reach the low 70s vs. the greenback. Japan, he said, can do nothing to stop this advance unless the U.S. helps.


    The bottom line: Foreign investors have bought 20.9 trillion in yen-denominated securities so far this year, creating record values for the currency.

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