The yen surged to a postwar high on Thursday, at one point hitting the 76-77 yen range to the U.S. dollar, despite concerns about the effects on the Japanese economy of last week's mega-earthquake, catastrophic tsunami and an unfolding nuclear crisis.
The yen surged to a postwar high on Thursday, at one point hitting the 76-77 yen range to the U.S. dollar, despite concerns about the effects on the Japanese economy of last week's mega-earthquake, catastrophic tsunami and an unfolding nuclear crisis.
Speculative funds are flowing into markets, aggressively buying yen amid expectations that Japanese businesses will increasingly sell overseas assets for yen to secure immediate cash reserves.
In Tokyo, the yen was trading in the 79-yen range Thursday after smashing the previous postwar high of 79.75 yen set nearly 16 years ago during trading in New York overnight. In Sydney at one point, the yen hit a high of 76.25 yen against the greenback.
The yen strengthened to the 78.80-yen range in Tokyo just after trading started.
The strong yen will deal an additional blow to export-oriented businesses that are already bemoaning the currency's high value, a nosedive in share prices in Tokyo and the March 11 Great East Japan Earthquake.
The yen's advance, by nearly 5 yen at one point, was fueled by a growing view that "the Japanese economy will fall into a critical situation, dragging the world economy down with it," as one official of a big brokerage put it.
A high-ranking official of the European Union commented that the quake-stricken nuclear power plant in Fukushima Prefecture was "effectively out of control." The comment sent stock prices plummeting in U.S. and European markets.
The remark added to speculation that Japanese investors and businesses will sell overseas assets and dollar assets so as to have yen in hand at home.
Some expect Japanese institutional investors such as life and nonlife insurers to pull out their funds from overseas markets to prepare for insurance payouts once things settle down.
Expecting that the high yen will further depress stock prices, foreign investors were buying yen and selling shares at the same time, according to market sources.
Funds flowing out of stock markets are also being poured into bonds, which are deemed safer, pushing up U.S. Treasury security prices and causing interest rates to fall. This spurred moves to sell dollars and buy yen.
The unusually sharp spike in the value of the yen will not just batter export-oriented companies. It will also fuel anxieties in financial markets, further driving up the yen and pushing down share price.
Tokyo share prices tumbled again in early trading Thursday, with the key Nikkei 225 index giving up 454 points at one point.
The index later regained some ground to end the day's trading at 8,962.67, down 131.05 points from Wednesday's close.
The Bank of Japan on Thursday offered to pump in 9 trillion yen ($112.5 billion) to short-term money markets via a same-day operation to quell the market turmoil, bringing the total over the past four days to 65 trillion yen.
To curb speculation and prevent investor panic, market players say Japan's monetary authorities will likely have to intervene to sell yen and buy dollars.
Group of Seven finance ministers were set to hold a telephone conference early Friday to discuss measures to deal with the yen's rise and its effect on foreign exchange markets.
The ministers are also expected to discuss stock market fluctuations as well as ways to rebuild devastated areas in northeastern Japan.
Some market players, however, are concerned about a sudden turnaround in the yen's strength as anxieties over the Japanese economy in ordinary times weaken the yen.
An official of a foreign bank said the unfolding crisis at the Fukushima nuclear power plant offers no positive fodder for the yen's purchase.
"The worst-case scenario is not the high yen, but rather a surge in 'Japan selling,' with the yen diving along with stocks," said an official of a leading bank.
Meanwhile, automakers and electric appliance makers, many of which have been forced to suspend operations after the temblor, are notably jumpy about the yen's rise.
"Factories that earn foreign currency (through exports) will be important for Japan's rehabilitation from the earthquake," said Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association. "It is unbearable that those efforts are bedeviled by the high yen."
Among Japanese automakers, 30 to 70 percent of their domestic production is for overseas markets.
A 1-yen increase in the value of the yen against the dollar will sharply slash annual operating profits--by 30 billion yen at Toyota Motor Corp., 17 billion yen at Honda Motor Co. and 15 billion yen at Nissan Motor Co.
"More bad news comes from the nuclear power plant each day," said an executive of a major automaker. "The yen's strengthening is too sharp."
Hitachi Ltd. has many key factories in the city of Hitachi, Ibaraki Prefecture, whose operations have been stalled since the quake struck. Overseas sales account for 40 percent at the electric maker's output.
"We have not been able to grasp the full picture of the devastation," said an official. "First, we need a clear picture. All we can do now is to monitor the yen's moves."
For the steel industry, the strong yen will have an adverse impact on exports but will help with the purchase of iron ore and coal imports.
An official at Nippon Steel Corp. said the yen's effects will be "neutral." But its steel plant in Kamaishi, Iwate Prefecture, has been forced to stop production due to quake damage.
Stagnant exports by automakers and electric makers, its key customers, will likely deal an indirect blow to the steelmaker.
"Such sharp fluctuations must be prevented by bringing the nuclear crisis to an end at an early date so trust in Japan will be regained," a business leader said.