In the run-up to the end of the financial year, the Japanese currency has strengthened slightly. USD/JPY, which ten days ago was threatening the 84.0 level, fell below 82.0 for a time overnight. Part of the explanation for the turnaround lies with profit-repatriation flows by Japanese companies that frequently occur around this time of the year. Also, interest rate differentials between the US and Japan are narrower, helped by Fed Chairman Bernanke’s recent remarks which scuppered talk of an early rate hike in the US. Plus, risk appetite has stalled amidst growing concern over the slower pace of growth being recorded in China and parts of Europe.
Notwithstanding this improvement, once these year-end flows have run their course it remains to be seen if these latest gains in the yen are sustainable. As last night’s deluge of data demonstrated, the economy in Japan is still struggling to adjust in the aftermath of last year’s tsunami and earthquake. In February, industrial production was much weaker than expected, falling by 1.2% (although firms are expecting to raise production this month and in April). Tokyo remains utterly determined to prevent any yen strength; policy-makers were overjoyed in February and in the first half of this month by the consistent decline in the currency, and they would love it to continue. At the same time, Japanese authorities have been encouraging local residents and institutions to invest offshore, and, to some degree, they have been obliging. With yields back home essentially at zero, it is not a difficult case to make.
As such, should US yields start to edge higher again, policy-makers in Japan might just get what they wish for. Their economy desperately deserves it.