Japan’s doing well – so why is the yen plummeting?

What’s wrong with the yen? With the Japan’s economy finally showing signs of life, the stockmarket up over 30% year-to-date, and the bank of Japan hinting it may soon tighten its famously loose monetary policy, you’d think the currency would be soaring.

By Harry Stourton

published 9 December 2005

in Features

What's wrong with the yen? With the Japan's economy finally showing signs of life, the stockmarket up over 30% year-to-date, and the bank of Japan hinting it may soon tighten its famously loose monetary policy, you'd think the currency would be soaring.

But it isn't. Instead, it's fallen 18% against the dollar this year (there are now 121 yen to the dollar) and is currently at a seven-year low against the euro.

This isn't as surprising as it sounds, says Steven Johnson in the FT. The same happened in 1985 when, despite the fact that the Nikkei "was well on its way to its 39,000 peak", the yen collapsed to 260 to the dollar. It seems that when the Japanese economy is on a roll, Japanese risk aversion falls, and as a result Japan's investors move more money into foreign markets to bump up the yield on their investments (Japan still has zero interest rates). The bulk of this yield-chasing cash has headed to the US, where Japanese investors can now get 4.27% more from a one-year US bond than they can from a one-year Japanese bond.