At times, a set of complex factors come to bear on a country's currency; sometimes these factors are seemingly illogical. Such is the case of the Japanese yen. The Japanese economy, along with the rest of the world, is getting weaker; the Japanese stock market is falling; exports are dropping; and the Bank of Japan warned this week Japan's economy probably will contract this year.
So then, why is the yen so strong? Well, first, Japan did not suffer large losses from the sub prime crisis, leaving Japanese banks in relatively good shape. Second, Japanese investors are deleveraging their overseas investments, creating large cash inflows into Japan. Third, the yen is now seen as a "safe haven" currency.
When trading against the dollar, the yen reached a thirteen and a half year high. It reached a seven year high against the euro. The downside of the yen's strength is that it is hurting Japanese exports. There is talk in Japanese banking circles that the Bank of Japan may intervene to curb the rise of the yen. While this move is not imminent, there could be action taken by this March.
Would you buy the Japanese yen?
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