Intuitively, you may think that a country wants to have a strong currency, as strong as possible, really. However, this is not always the case. In fact, a strong currency can be a burden on an economy.
Why is this important?
It’s important because there may be scenarious when governments take action to lower the value of their own currency to protect their economy.
To explain why this is the case, let’s look at Japan and the rising value of the Yen.
Last week, the Yen increased in value against the USD and the USD/JPY fell to its lowest level in 15 years!
This is bad news for Japan as its economy is based first and foremost on exports. It needs to be able to sell products to other countries with other currencies.
As the Yen is rising in value, the income Japanese companies are receiving from their exports are worth less in their local currencies, the one in which they need to pay wages and other expenses.
Now that the Yen is rising, the Japanese government is searching for ways to bring it down. One way to do it is to get involved in the day by day Forex trading and to begin selling Yens in the hope that this will bring down the value of the national currency.
However, the effectiveness of such a move is highly doubtful as the volume of trading in the USD/JPY alone exceeds $560 billion (according to this article from WSJ). With such a high volume, it will take a huge amount of Yens to influence the price for any meaningful length of time.
This is an example of how big the Forex market has become, that the world’s third largest economy’s goverment seems simply powerless to do anything about the value of its own currency. In fact, if the Japanese government shows signs of its intention to interfere with the regular trading, it may see speculative traders take advantage of this attempt and test its commitment, something that may cause the Yen to rise in the long run.
I doubt that Japan can do a lot to influence the long term value of the Yen. However, it will be interesting to see how this affects the overall economic situation in Japan. I’ll keep you posted.
