Soaring yen hampers Japan's recovery

While sterling has hit the skids, the yen is attracting attention for the opposite reason. It has climbed to an eight-month high of just under 90 against the dollar, having gained 16% against the greenback in the past year. The Japanese currency has also become more volatile over the past fortnight. That's thanks to the government, which recently told the markets that it didn't support a "weak yen" policy making intervention seem less likely than under the last government but then signalled that it may intervene.

What the commentators said

A key reason for the yen's strength is that Japanese savers are bringing money back home now interest rates are so low abroad, said Ian Campbell on Breakingviews. Meanwhile, low interest rates outside Japan have prompted the carry trade to shift to dollars, bolstering the yen. But a strong currency is "making the economy weaker".

On the export front, the vital factor is foreign demand, rather than the currency, said Capital Economics, since Japan exports "sophisticated high-value items". Foreign demand should continue to climb for now, so the export-led recovery should continue. But "the strong yen is without doubt bad news", in that it lowers import prices, which boosts deflation. Prices are falling at a record annual rate of 2.4%.

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Oil prices are the main reason for the fall, but weak consumer demand wages have fallen for 14 successive months is also beginning to bear down on prices. Japan could eventually end up in another "deflationary spiral" of falling wages and prices, said Kyohei Morita of Barclays Capital. Like everywhere else, Japan is in for a fragile and patchy recovery.