Tokyo’s exchange rate intervention.

Japanese yen has risen against the dollar to Y75.69. The strong yen has prompted the finance ministry of “decisive action” in the currency market. Yet Japanese policy makers are unlikely to follow suit the Swiss example of explicit exchange rate target i.e. committing itself to sell unlimited amount of domestic currency to prevent the euro from falling below Sfr1.20.

The global financial crisis of 2008, QE rounds announced by U.S Federal reserve, and euro zone debt crisis has led both the currencies, yen and Swiss franc, to appreciate substantially.  In order to counter the surging rates, the Swiss National Bank and Bank of Japan both cut interest rates to zero and engaged in unilateral intervention. Lower interest rates might cause a depreciation of the exchange rate and boost demand for domestic producers who sell goods and services in internationally traded markets. Officials in Japan are concerned that the strength of the yen will result in local companies relocating factories and jobs to competitive destinations like U.S.

Despite policy makers desire to prevent Yen strength, policymakers will not pursure the explicit exchange rate target for the following reasons:

•             The yen is not trading at extreme levels as the record levels reached by the franc against both the euro and the dollar.

• Since Japan is a G7 member and has a 3^rd largest economy, any move for target its exchange rate explicitly will be met by criticism from N America and Europe, particularly as it would make it harder to press China to appreciate the renminbi at a faster pace.

• Japan has more policy options; When Swiss pursures QE, it has little choice but to print money and buy foreign bonds, making franc weaken. In contrast,  when Japan pursures QE, it can print money and buy local government bonds as the Japanese government bond market totals a huge $7000bn. 

Due to above reasons, Japanese policy makers are likely to intervene periodically in the currency markets while undertaking further QE at home to curb strength of Yen.

N.B Assuming all other factors constant, the disadvantages of a strong currency would be:

1. The lower price of imports leads to consumers increasing their demand and this can cause a large trade deficit. Exporters lose price competitiveness because they will find it more expensive to sell in foreign markets and face losing market share - this can damage profits and employment in some sectors and industries.
2. If exports fall, this causes a reduction in aggregate demand and reduces the short-term rate economic growth as measured by the % change in real GDP. Some regions of the economy are affected by this more than others. In the North east for example, manufacturing industry accounts for over 28% of regional GDP whereas the percentage for the UK as a whole is just 19%.
3. Because investment is partly dependent on the strength of demand,If exports fall, then so will business confidence and capital investment.