Yen breaches 100 threshold mark against US dollar

Japanese Yen v US Dollar

Last Updated at 17 Dec 2014, 14:40 ET *Chart shows local time JPY:USD intraday chart
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The Japanese currency has breached the 100 yen to the US dollar mark for the first time since April 2009.

It broke the threshold in New York on Thursday and was trading close to 100.8 yen to a US dollar in Asia on Friday.

The yen has fallen nearly 25% against the US dollar since November, after Japan unveiled a series of aggressive moves to spur growth in its economy.

The drop has helped boost exporters' profits and triggered a rally in the country's stock market.

The Nikkei 225 index rose nearly 3% on Friday. The benchmark index has surged more than 55% since November last year.

The Japanese currency has come close to the 100 yen to the dollar mark in recent days, but has been unable to breach that level.

Analysts said that on Thursday, strong data out of the US, which showed that first-time applications for unemployment insurance had fallen to the lowest level in more than five years, had helped the yen pass the mark.

The data triggered hopes of a sustained recovery in the US economy, they said, resulting in investors ditching safe-haven assets such as the yen in favour of the US dollar.

"A stampede out of safety and brightening US job prospects helped catapult the dollar over the key triple-digit threshold against the yen," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

Aggressive measures

Is "Abenomics" the cure for Japan's deflation?

Japanese policymakers have taken various measures as they try to revive the country's sluggish economy.

A key policy initiative has been the Bank of Japan's decision to set a target inflation rate of 2%.

Unlike other economies in the region, Japan has been fighting deflation - falling prices - for most of the past two decades. That has dampened domestic demand as consumers and businesses have been putting off purchases in the hope of getting a cheaper deal later on.

Earlier this year, the central bank announced that it would double the country's money supply and buy long-term bonds to keep interest rates low.

The idea was that with more money in the system, and at a cheap rate, more people would have cash to spend, driving up consumer demand and eventually consumer prices.

All these measures have resulted in the yen weakening significantly over the past few months.

A weak yen bodes well for Japanese exporters. It not only makes their goods cheaper to foreign buyers, which should help boost sales, but also lifts their profits when they repatriate their foreign earnings back home.

The latter impact is already being felt by Japanese firms.

Over the past few days, leading exporters, such as Toyota and Sony, have reported a jump in profits, courtesy of a weak currency.

And with the yen expected to remain weak in the medium term, they have forecast a further jump in profits in the current financial year.

Double-edged sword?

However, some analysts have warned of the risks associated with these aggressive measures and the yen's continued weakness.

Start Quote

Every decline in the yen against the US dollar means Japan is paying for more for its energy needs - it's a steep rise in costs for everybody”

End Quote Sean Callow Westpac

They say that if Japan's economy does not start showing signs of recovery, and with interest rates in the country close to near zero, it may see a rise in "carry-trades".

This happens when traders around the world borrow yen at very low interest rates and use it to buy currencies to invest in countries where interest rates are higher.

Such trades have no impact on the real Japanese economy, but they result in the yen weakening further.

That would not bode well for Japan, not least because the country has seen its fuel imports rise in recent times, after almost all of its nuclear reactors were shut in the aftermath of the earthquake and tsunami in 2011.

"Every decline in the yen against the US dollar means Japan is paying for more for its energy needs - it's a steep rise in costs for everybody," said Sean Callow, senior currency strategist at Westpac.

Mr Callow said that while a weak yen would help boost profits of exporters, the rise in energy costs "would offset some of those gains".

At the same time, there are also concerns that if investors start to fear that the currency may keep on weakening, they may start to withdraw their savings and invest outside Japan.

That would not only put further pressure on the yen, but also see deposits in Japanese banks dip.

Some analysts have warned that in a worst-case scenario Japanese banks may not have enough cash to buy government bonds. As a result, the government may not be able to raise enough fresh money for its regular operations as well as to repay its debt.

"In that scenario the government will either face bankruptcy or the Bank of Japan will have to keep printing more money, which will eventually result in hyperinflation," said Takeshi Fujimaki, of Fujimaki Japan.

Hyperinflation involves price increases running out of control as a currency collapses in value.

"This is good for the government as the value of its debt will shrink immensely, but it will be miserable for the Japanese people as the value of their savings will erode," said Mr Fujimaki.

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