In a volatile market, short the yen

Japanese pedestrians cross an all-way intersection outside of Shinjuku Station, one of the busiest train stations, in Tokyo, Japan. Catherine Ngai/MEDILL
There are few things that are certain in life, and shorting the yen may be one of them.

The Japanese yen hit a 15-year high against the dollar and a nine-year high against the euro last week. As economic conditions in the U.S. deteriorate, speculation is heating up Japan’s Central Bank will take action to weaken the currency.  

“The dollar should be worth 150-160 yen,” said Marc Dollinger, a professor of business administration at Indiana University who previously taught at the International University of Japan and the Hong Kong University of Science and Technology. “However, it’s only half of that. The purchasing power is way out of balance.”

Confidence in Asia has, for the past decade, been an easy decision. With a booming marketplace in China, and increased technology, looking East for direction in the world economy has been a common trend. Except for Japan, where over the same time period, growth has dragged.

But it wasn’t always that way.

Starting in the 1960s, Japan’s economy was so strong that some dubbed it an “economic miracle.” Growth rates for the Asian country were at all-time highs. In the 1960s, real economic growth averaged 10 percent. In the 1970s, this growth was at 5 percent. In the 1980s, this growth leveled to 4 percent.

However, due to an overheated real estate sector, the bubble burst in 1989 with the crash of the Tokyo Stock Exchange. Since then, its economy hasn’t been the same. Japan entered into recession in 2008, with 2009 marking a return to near zero-percent interest rates.

Oddly enough, its problems are unlike those of the U.S., where subprime mortgages and complex derivatives were largely to blame. It was much simpler than that.

“Japan can’t stimulate internal demand, especially with China hovering over their shoulders,” Dollinger said. “The economy is flat, and it’s not growing.”

As added pressure to the yen,  Japan’s exports rose just 23.5 percent in July from a year ago, after rising 27.7 percent in June. It was the fifth straight month in which export growth slowed, according to the Finance Ministry. As a resource-poor country, Japan depends on heavy exporting to remain competitive in the world economy.

“The Japanese, in the past, at times of economic depression, has not allowed their currency to be so high that it impedes their export power,” said Thomas Duesterberg, president and chief executive officer of the Manufacturers Alliance/MAPI, a public policy and economics research organization in Arlington, Va.

Still, Duesterberg is somewhat optimistic about the potential growth and outlook for the nation.

“It’s going to be an anemic growth. Japan is in the most dynamic area in the world economy. The Pacific Rim is still growing, and Japan has a pretty good presence,” Duesterberg said.

The yen closed at 84.6 versus the dollar at market close in Asia Wednesday.

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