Today's Wall Street Journal had a very interesting, but short, article on the changing shift in the Japanese outlook towards the Yen. Having spent some time in Japan, I always take a special interest in the Yen and its Forex policies. As you may already be aware, Japan has undergone a significant, fundamental shift in the ruling party of its government. This change has also affected the focus of the Yen.
Keep in mind that the foreign currency exchange rate is always a fine balancing act. If the currency is too strong, then foreigners will not be able to purchase your exports and you won't be able to gain foreign tourists (it's too expensive to visit). If the currency is too weak, then your imports suffer and your people will not be able to have strong purchasing power or travel abroad. Previous Japanese goverments always err'd on the side of keeping the Yen artificially weak. The Japanese Central Bank was a very active participant in the Forex market and would actively buy up US Dollars while selling Japanese Yen. This would favor their exports (making Japanese exports very affordable in other countries) but hurt their imports. This is not necessarily a bad policy as long as the demand for Japanese exports remain high.
However, the new Japanese goverment has vowed to stop this intervention and let the Yen float more freely against all other currencies. The net result? The Yen has now hit levels of strength against the Dollar that has not been seen in years. And the Hatoyama government is showing no signs of intervening. To the Japanese this has a two-fold effect. One, exports by the Japanese have now become very expensive for foreigners. So you would expect the 2010 outlook for these companies to be dim (think Toyota, Honda, Sony, Panasonic, etc). Second, imports of desired goods, many of which were previously too expensive, have now become much cheaper for Japanese consumers. Luxury good companies like Louis Vuitton (LVMH) and maybe other companies like Ford (which has had a long Japanese presence) can now be more optimistic about their 2010 outlook in Japan.
The net result of all this is that the Japanese government has shifted its reliance on exports and foreign consumers (which is to say, in many respects, the American consumer) and is now betting on its cheaper imports and the spending power of the Japanese consumer. This is great policy, the Japanese are simply betting on themselves, nothing wrong with that. The Japanese are great consumers, but they're also great travelers. It's possible that this strategy might put more Yen in other countries than currently anticipated, but that remains to be seen. Either way, it will be an interesting year for Japan in 2010.
