Yes, a Strong Currency Can Kill an Economy Just Look at the Japanese Yen…

By Sean Hyman, Currency Analyst   

Common sense says a strong currency should help a country right? Well, not always.

It actually depends on whether you import or export most of your goods. If your country is a net exporter of goods, then a strong currency could help your economy. But if your country is a net importer of goods, then a strong currency could wreak havoc on your economy.

So it all depends on how your country operates. Here in the U.S. we tend to benefit from a stronger currency overall because as consumers, we can use stronger dollars to buy up foreign goods abroad. And you know we like to buy up some stuff overseas.

(Image 4) However, if your country depends upon exporting goods for the bulk of your income, then a strong currency could seriously hurt your economy. Why? Because you want your exported goods to appear cheap, and a strong currency makes your exports expensive.

If potential buyers think that your goods are too costly, then they will take their business to another cheaper country and avoid yours.

This has been happening in Japan for over a year now, and continues to this day. Last year, the yen outperformed every major currency of the world (even the dollar). In fact, it has grown a full 19% against the dollar in just five months. Check out the chart below and you’ll see the dollar plummeting versus the Japanese yen. After all, a picture is worth a thousand words.

If you were the CEO of Toyota, Sony, etc. this is what you would toss and turn in your bed at night about. Think I’m exaggerating? Let’s take a look and see.

The Strong Yen Causes Record Losses for the Big-Name Japanese Stocks

Hitachi just plunged to a 28 ½ year low and NEC fell to a level not seen since 1978. Sony is projecting a RECORD operating loss this year.  

Hitachi’s loss was so bad that they are now projecting a 700 billion yen loss after formerly forecasting a 15 billion yen profit. Big difference, right? 

NEC said its loss will reach 290 billion yen vs. a former forecast of 15 billion yen. They are also cutting a whopping 20,000 jobs. Ouch!

Fujitsu will likely book a 20 billion net loss vs. a former forecast of a 60 billion yen profit. That’s incredible.

Honda cut its full year profit forecast by 57% last week because the company originally based its earnings on a USD/JPY rate of 96.00. In case that sounds kind of close to you…every yen (1.00) away from the current price reduces Honda’s operating profit by 18 billion yen. Huge difference huh?

I told you it was a nightmare!

Can You Say “Intervention?”

The soaring yen is causing the deepest recession in Japan since 1945. Obviously, it’s not your average recession for them. While I agree that there are other factors involved such as the overall global slowdown, the yen is a HUGE part of the problem.

You see, the exporters really need the yen at around 100 to 110 to the dollar to stay competitive. Right now, the problem is that the yen is under 90 to the dollar.

As a result of the “fast and furious” yen, exports have fallen an unprecedented 35% just since December from a year earlier.

Literally, the manufacturers are campaigning for the government to step into the Forex market and intervene. The last time they did this was back in 2004 when the yen was at 103. At the time, they sold 14.8 billion yen in the first three months of the year to push down the yen’s value. The yen is already much lower than that now.

The End of the Year Boost Is About to Drive the Yen Higher

Another problem plaguing the Japanese is that historically the yen rises between now and the end of their fiscal year (March 31st). It’s customary for exporters to buy the currency to hedge revenues and for money managers in Japan to repatriate their funds.

This is a nightmare that I wouldn’t wish on anyone, and what has been the biggest root cause of it all? The enormous rise of their currency.

This is a classic example of how knowing about currencies can help you in other markets. As a currency trader, I already know the USD/JPY rate, so I know whether these exporters have the wind to their backs or the currency will crush their stocks.

For the past year, it’s been obvious that Japanese stocks would sink under the pressure of the stronger yen. This is why all stock traders and currency traders should know more about what is going on in currency land. 

And it’s also important to know that a strong currency doesn’t always equal a strong economy. Sometimes it’s just the opposite…

Sean Hyman

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