92 yen to the dollar — why?

A quick look at the currency charts will show that the yen has rocketed from 110 yen to the dollar this summer to 92.5 as of this posting. Since this question is on my mind, I just want to post a couple of explanations for why this is happening.

Almost Overnight, Yen Is King Of Currencies

The dollar lost 7 yen in one day alone, the biggest single-day drop since October 1998, when the greenback plunged some 12 yen due partly to the financial troubles of a leading U.S. hedge fund. The euro zone currency and pound suffered drops of 14 yen and 20 yen, respectively.

In the blink of an eye, the yen has become one of the strongest currencies in the world. With the U.S. financial crisis spilling over into Europe and emerging nations, investors seeking out high yields and strong growth have pulled money out of their investments in droves. They are instead taking refuge in the yen, since the Japanese financial market is relatively stable.


Oct. 24 (Bloomberg) — The yen climbed to a 13-year high against the dollar as a worldwide drop in stocks encouraged investors to dump higher-yielding assets and pay back low-cost loans in Japan.

Japan’s currency surged to the strongest in six years against the euro as the prospect of a deepening global recession prompted the unwinding of carry trades (ed: currency investments that seek to profit from differences in interest rates between currencies). The pound fell below $1.53 after the U.K. economy shrank in the third quarter. The dollar rose to a two-year high versus the euro as investors sought refuge in the greenback.

“It’s time to hunker down for the winter,” said Scott Ainsbury, a portfolio manager who helps manage about $15 billion in currencies at New York-based hedge fund FX Concepts Inc. “It’s a flight to quality. It’s an unwinding of leveraged carry trades. Money is going back to dollars.”

Financial Times:

Yen surges as panic grips market

By Peter Garnham

Published: October 24 2008 11:05 | Last updated: October 24 2008 11:05

The yen surged higher on Friday, hitting 13-year highs against the dollar and pound and jumping to a six-year peak against the euro as panic gripped global markets and forced investors to abandon risky positions.

Traders said investors around the world were being forced to liquidate positions in equities, commodities and higher-yielding currencies amid growing evidence that the global economy was headed for a sharp downturn.

I am just wondering how much stronger it will get! An ad for Shukan Bunshun told me to prepare for a world where 70 yen to the dollar seems normal, but I don’t usually turn to them for investment advice… At the very least, the yen might appreciate more in tandem with the worsening economic situation, at which point the govt might try to intervene, but they might not have the money… ARGH this is confusing.

26 thoughts on “92 yen to the dollar — why?”

  1. This is as good a time as any to move yen to dollars. It may get better, it may stay this good for a while, it’s really hard to know in this unprecedented situation.

  2. This is good news for Adam, who makes money in Japan and has US loans to pay off, but sort of lame for me. I can easily survive on the yen-denominated stipend I get every month, but the rest of my money is in my US bank, which means that I’m now suddenly very reluctant to actually use any of it in Japan. So much for buying that new Canon D-SLR 50D before the end of the year…

  3. It also doesn’t help that all the freelancing I’ve done lately has been in dollars. I need some yen denominated work!

  4. Currency trading is one of the big dangers of a global economy. The collapse of the European economy immediately preceding WWII had many factors, but was largely due to currency traders shifting their money around in response to perceived strengths and weaknesses, causing wild fluctuations in said currencies worth, resulting in massive consumer panic across the continent.

    If interconnected, stable, thriving national economies are the goal, then the best policy is to invest privately in startup business or private equity funds. Private equity investments side step the semi-random fluctuations of the public markets, and give investors the opportunity to closely evaluate the business practices and the team behind the companies they are investing with.

    Many private start up companies such as those in entertainment, electronics, alternative energy, and other fields with plenty of room for innovation, offer exceptional returns for investors as well as creating the kind of jobs and opportunities which make the entire economy more prosperous.

    It’s very important to think about the long term consequences of investment strategies, as the 1930s, late 1980s, and this autumn have proven.

  5. The swiss franc is in there with the dollar, lost 20% of its value to the yen in a month… That hurts.

    Could be worst though, we could be Icelanders

  6. It looks like pretty much every currency has gone down more than the USD, except for the Yen. I sort of wish I were planning a trip to Europe right now.

  7. Yeah, pumping all my money in an online gaming startup is much safer than investing in currencies…

    Anyway, in today’s Nikkei a senior staff writer is already calling for massive intervention to protect Sony’s profits:

    “Wide-ranging action, including currency market intervention and monetary policy changes, are needed by the start of next week. Only three weeks remain until the U.S. hosts a summit on the financial crisis. The financial markets are targeting Japan, probing its willingness to engage in international cooperation.”

    The NYT was also reporting a rumor that the G7 might decide on some coordinated effort to affect forex rates:

    So great are the concerns among policy makers about the turmoil in currency markets that it has prompted talk of a coordinated intervention by the leading industrial countries in coming days, to quell the soaring dollar and put a floor under emerging-market currencies.

    Such a move — in which the Federal Reserve and other central banks would sell dollars and yen and buy other currencies — has been used extremely sparingly by the United States in recent years.

    “The risk is huge, but it is appropriate at this point, because if the emerging markets go into default, the consequences would be catastrophic,” said Kenneth S. Rogoff, an economist at Harvard.


  8. What is the best way to move your yen into foreign currency? I’m moving back to Europe in a couple of months, and all my savings are in yen. I should probably avoid asking for financial advice on the Internet, but since I don’t hang out with other expatriates (mostly for geographical reasons), I thought I’d ask here anyway.

  9. I am guessing you dont want to carry wads of cash? Thats always one method

    golloyds.com seems like the easiest way to go about foreign wire transfers… I havent tried it yet but I am hearing rave reviews. they offer a foreign exchange service and then charge 2000 yen per transfer

    You could also try and send the funds through a bank (Shinsei Bank is an option if your current one wont do it)… they offer the same service as Lloyds but charge 4000 yen or so for it.

  10. Well 4000 yen seems to be the standard rate. I’d just compare the exchange rates at a couple of different banks, but the most important thing is to act at the right time, since the Euro is doing pretty poorly vs. the yen. You could always leave some of your savings in Japan and check with your bank how you could request a wire transfer later or see if a bank in Europe will let you carry a yen balance to convert later, as Shinsei and Lloyds in Japan do for foreign currencies.

  11. I would argue that you shouldn’t worry too much about timing since it sounds like kind of a one-off deal (youre moving back for good). But Roy is right — if you dont need the money straight away you can probably wait until it is advantageous to transfer… But Japan has like zero interest so you are better off keepign savings in European banks

  12. You can’t really predict currency shifts in the short run because humans do to many dumb things in the short term. However in the long term reality usually sets in, and trends are more predictable.

    The long term prospects of the yen are not bad, because Japan still has an economy in which people make things. Also its banking system wasn’t heavily burdened with the same problems that America and Europe are now having. Note, America is not moving to clear away bad assets nearly as fast as they should, and instead is propping up financial institutions which based on the bad assets they have should be failing.

    The long term prospects for the American dollar are really bad. America doesn’t make anything of value (except in the military industry plus a few other areas). America’s economy is 70% consumption and most of that has been based on a credit bubble. Deflation is taking place, and the Fed is pumping out dollars to fight it. What happens when the deflation stops and bank leveraging starts again. The deflation could reverse and become massive inflation.

    Again, though short term rates your going to fluctuate a lot I think, especially as politicians try to get in there and adjust them, and traders panic, and so on. However, long term prospects for yen are great, I think, and for the dollar their terrifying.

  13. Matt, that sounds good on initial inspection, but there are a couple of questions off the top of my head. First of all, how to explain the strength of the British Pound? I literally can’t think of the last time I saw a product made in the UK, aside from some minor food imports, and yet their currency has been amazingly strong (although weakened by this crisis.) Is there really that much of a relationship between manufacturing and currency strength? I’m actually asking-I have no idea.

    And although US manufacturing has shrunk quite a bit, I’m not so sure the percentage of the economy based on services in Japan is actually any lower. For example: sure, Japanese auto makers have taken over from American ones, but are all the Japan owned factories in the US really “Japanese manufacturing”?

    Japan also has its own problems, including government debt worse than the US, and the statement “Also its banking system wasn’t heavily burdened with the same problems that America and Europe are now having.” shows you might not know very much about Japan’s recent history. “Japan’s lost decade” has been invoked quite a few times in recent weeks to describe what is happening in America right now, and the current thinking seems to be that the USA Fed (or Treasury) is currently manipulating under the radar the bailout money that was supposed to be used for kickstarting loans to instead encourage bank mergers in an effort to duplicate Japan’s recent wave of bank mergers, which left them with a small number of mega-banks. Again I have little grasp of the real implications, as I know relatively little about finance or economics.

    I wish Saru were still posting/commenting, because he actually studied this stuff and I think he could help explain it pretty well.

  14. I’m not much of an econ expert but here’s how I understand the situation:

    Manufacturing isn’t that big in the UK these days, although there are still some behemoths holding up the fort on that side (Rolls-Royce and BAE are still huge in aircraft component manufacturing, and there are the British pharmaceutical giants like Glaxo). The UK’s big boost has been that its financial and insurance industries outpaced the US in recent years, mostly because of business-friendly regulations and more sensible immigration policies.

    It doesn’t matter how the country adds value as long as it actually adds value. The problem with the US is that it isn’t adding enough value in proportion to its population. A lot of the American service sector has been fueled by the housing market, essentially riding on value rather than creating it. There’s still a considerable industrial presence in the US, particularly in high-tech fields (Silicon Valley, Boeing, etc.), but it’s not that great, proportionally speaking.

    As for those Japanese factories in the US, they count as Japanese manufacturing because the profit does not stay in the US: it flows back to the parent in Japan and ultimately to its shareholders (most of whom are Japanese institutions like banks and insurance companies). There is a benefit to the US, but the benefit is in the form of salaries and supply contracts, which feed and clothe people (and generate tax revenue) but don’t do much to facilitate a whole lot of re-investment. This is the same reason why Mexico and China remain 90% poor despite huge manufacturing sectors: the profits end up with the owner of the factory, and all the locals get out of the deal are subsistence jobs.

    The banks are another issue entirely. Japan’s banks in the 80s went broke on corporate loans, where losses are easy to cover up for years (you just ignore the fact that the company probably can’t pay you back). This is why the J-banks didn’t start failing until the mid-90s even though the bubble burst in the late 80s. On the other hand, the worthless asset-backed securities on American and European bank books today are all marked to market, so any variation in their market value results in an instant profit or loss, which is why banks can now fail practically overnight. It’s a similar situation in theory, since the end result is bank failure, but completely different in practice: kind of like comparing dying of cancer (Japanese banks) to dying in a plane crash (American banks). Much harder to cover the effects of the latter than the effects of the former.

  15. “I literally can’t think of the last time I saw a product made in the UK, aside from some minor food imports, and yet their currency has been amazingly strong (although weakened by this crisis.) Is there really that much of a relationship between manufacturing and currency strength? ”

    Sorry. It’s not just manufacturing. It’s also savings and capital investment. I don’t know that much about the UK situation. I’m surprised by how strongly Europe has been impacted by the current situation. The current strength of the dollar will not last. It’s based first on people in America selling everything and anything, and thus various funds needing dollars to meet various technical requirements. And a blind faith in America that isn’t warranted. (Once the sell off is finished, and once reality begins to set in, the dollar will weaken against European currencies. In my opinion. But I don’t understand Europe that well.)

    As far as Japan’s lost decade, the banks are now pretty flush with cash now. It’s taken them a long time, but they not in bad shape any more. Europe and America’s financial system is tanking, so if Japanese banks act appropriately this could be a good opportunity for them. Expect America to be asking for Japanese handouts.

    Japan was so hung over from it’s own party, it missed the new one. And that’s a good thing.

  16. Joe,

    Your analysis sounds off to me. Japanese banks were not so opaque that people like Christopher Woods were not able to tell us they were all in danger back in 1992 and even before. The issue of being able to avoid downgrading bad assets is complicated. But you can be sure the government was complicit (at least in not wanting to rush through reforms at the time.) At the time Japanese banks were not required to report nonperforming loans, in fact they could report income from a nonperforming loan even if they hadn’t received payment in over a year. It was a real mess, and reform came only slowly.

    As far as this:
    “On the other hand, the worthless asset-backed securities on American and European bank books today are all marked to market, so any variation in their market value results in an instant profit or loss, which is why banks can now fail practically overnight.”

    Give me a break, you can’t be serious here. The problem so far is precisely that we can’t value the worthless garbage assets that are now on so many ledgers. If we let the market determine the value for these assets, we’d be seeing even more carnage.

    You need to read at least too articles here:
    Bernanke Is Fighting the Last War

    The Deeper the Downturn, The Quicker the Recovery

    Just two quick quotes from Anna Schwartz:
    ” … that’s not what’s going on in the market now, all these exotic securities that the market does not know how to value.”

    “Why are they ‘toxic’? They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up. We don’t know whom to lend to because we don’t know who is sound. So if you could get rid of them, that would be an improvement.”

    I’ll note that both the current bubble and the Japanese bubble had their source in central bank policy. In both cases, rates were set too low for too long which fueled the bubble.

  17. I’d guess the yen will hit 85 this week, maybe as early as today. Hard to say. Eventually the governments will start intervening with the hope they can drive it back up to near 100.

  18. “The problem so far is precisely that we can’t value the worthless garbage assets that are now on so many ledgers. If we let the market determine the value for these assets, we’d be seeing even more carnage.”

    MTM is still in use despite the lack of a market–relying on third-party valuation. A lot of stuff is getting priced at zero (once further repayment becomes mathematically impossible) or at pennies on the dollar. This is why banks have to write the assets down to the tune of billions of dollars, and also why many are lobbying to have MTM suspended (which obviously wouldn’t help credibility — it’s a proposal to bolster capital ratios).

    I think we just agreed regarding the Japanese banks. Or did I miss something?

  19. We had lunch last weekend with a guy who used to work for the Foreign Ministry but who now operates as an ODA “consultant” (he’s strictly legitimate, he claims!). He predicted that the yen would be 50 to the USD in two years’ time. I said that kind of yen appreciation would require a complete reversal in the mindset of Keidanren and the Finance Ministry, but he insists it’ll happen. Japan, according to him, is going to start following the European of producing high value-added goods rather than beggaring its currency in a futile attempt to compete with that manufacturing leviathan China.

    Food for thought, anyway. Japan does seem to be at a crossroads: will it continue to unofficially peg the yen to a depreciating US dollar, or will it let the yen appreciate. Certainly a higher yen would make for cheaper imports, especially oil.

  20. Failing American economy = Americans and their weak dollar buy fewer Japanese exports
    Failing American economy = China’s economic growth slows because Americans buy less manufactured goods
    Trouble for China’s economy = Trouble for Japan’s largest trading partner

    Sony, Canon, Toyota, and some of Japan’s other largest companies are slashing their earnings forecasts. Things will get very ugly if somebody doesn’t intervene and stop the Yen’s rise.

  21. Joe,

    I don’t think *any* specific rule or practice was a problem. The problem was not cleaning up the balance sheets fast enough. This might sound like a contradiction, but its not. The relevant people knew there was a problem, and they could have tried to facilitate bringing the problem to a head or to continue to avoid doing so. The relevant rules and business practices could have been altered. Each bubble has its own unique characteristics, kind of like Tolstoy’s unhappy families. But just like one of Tolstoy’s happy families, a healthy economy is pretty much always the same, it’s one where the market is allowed to work things out for better or worse.

    Things will be ugly all around, I’m sure. But in the end, Chinese can consume their own stuff, so can Japanese. If their currencies appreciate that will only make it easier for them to do so. They just don’t seem to realize that yet. Why should they all work really hard just to finance America’s ongoing fiscal debt and massive credit bubble? (Or what’s left of it.)

  22. James, good points. Canon cut their earnings forecast by 21% yesterday.

    Things will get very ugly if somebody doesn’t intervene and stop the Yen’s rise.

    Hopefully that someone will be the market itself. The government does not have a very good record at weakening the yen by intervention.

    The last time Japan actively manipulated currency markets was from January to March 2004. On January 1, 2004, the yen was at 104.40 against the dollar. On April 1, it stood at 104.40. By December 31 of that year, the yen had strengthened to 103.10 – the average trade in 2004 was at 108.17451.

    Government intervention isn’t likely to be large enough to affect the $4 trillion daily forex markets, unless it can sway the strategies at the big banks – Deutsche Bank and UBS alone account for over 35% of volume in the forex markets.

  23. Good article on currency exchange:

    I think what they say there only reinforces my opinion that the current strength we are seeing in the dollar is technical. There is some truth to this also as far as the yen.

    That’s why short term it’s hard to make predictions. But once all this clears, I think the yen will remain strong via the dollar.

  24. “It also doesn’t help that all the freelancing I’ve done lately has been in dollars. I need some yen denominated work!”

    I’m living in Japan and drawing a foreign salary (in a currency that has tanked against the US dollar at that….). I cry myself to sleep at night.

  25. It should be noted that the people most worried about the great yen are the Japanese. The Keidanren is going nuts, politicians are speaking out against it and “taking action,” businesses are fretting about how expensive their exports will become, and the the tourism industry in Hokkaido is bemoaning the drop in Aussie tourists they were expecting in the winter.

  26. As someone who gets an income in yen, I am mostly a bit upset at the fact that had I gone to Europe a month or so later, I could have saved maybe as much as a third. My wife told me she heard on the news that the banks in Japan are no longer selling dollars (I assume this is for foreign exchange, and because all those housewives have rushed in).

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