Tensions between Japan and China over Taiwan add pressure on the yen

Once upon a time, the Japanese yen rose by leaps and bounds, becoming a safe haven currency alongside the mighty US dollar.

It was in the 1980s, when Japanese products dominated world markets, helping the land of the rising sun grow at a breakneck pace. Some international observers spoke of the Japanese miracle which served as an example for the rest of Asia. Others have seen Japan replace the United States in global economic leadership.

But the Roaring 1980s did not turn into the Roaring 1990s. Instead, the Japanese economy entered three decades of stagnation, which has lasted to this day. Meanwhile, the Japanese government launched dozens of fiscal stimulus packages to revive growth, but to no avail.

Additionally, the Bank of Japan flooded the financial markets with yen to deal with the deflation that accompanied economic stagnation. It is a policy that the national bank continues to this day, although deflation has turned into inflation.

But that’s not good for the value of the yen, which has accelerated its descent in recent months. “The Japanese yen has fallen sharply since early March – it is at levels not seen in 20 years – due to a confluence of reasons, including the Bank of Japan’s intervention to keep its 10-year bond yields at 0.25% or less, higher US yields, slowing global growth, rising energy and commodity prices, and peripheral fear that Japan will be dragged into a war to protect Taiwan from China,” says Michael Ashley Schulman, CFA Partner/Chief Investment Officer at Running Point Capital Advisors.

Meanwhile, Schulman thinks the yen’s weakness reflects Japan’s weak economic growth vis-à-vis the United States “Japan is much more dependent on (slowing) global growth, and Japan is an importer net of energy and raw materials and therefore affected by rising global commodity prices,” he says.

Marcus Clarke, founder of Searchant.co, believes that more macroeconomic factors are at play. rate of economic growth that are relative to each other,” he said. The yen’s decline coincides with expectations that the Bank of Japan will be more cautious in tightening monetary policy than other central banks.”

Then there are geopolitical factors like rising tensions in the Taiwan Strait, which further undermine the yen’s status as a safe-haven currency. “Although the yen is generally considered a safe asset in times of risk or uncertainty, it has lost much of that safety shine since former Prime Minister Shinzo Abe began publicly proclaiming that Japan would not stand by if China attacked Taiwan,” adds Schulman.

Still, the sharp decline in the value of the yen may not be so bad for the Japanese economy. This makes Japanese products more competitive in world markets, which helps boost exports. But it can be bad for the regional economy, as it risks a currency war with China and South Korea selling competing products in global markets.

And that “should be a concern for companies exposed to risk anywhere in their supply chain,” says Steve Scott, head of APAC at Taulia.

Japanese 1000 yen banknotes and Chinese 100 yuan banknotes are seen in a photo, in Beijing, China January 21, 2016. Photo: Reuters/Jason Lee

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