The resurgence of strength that has unexpectedly buoyed the yen in the past few days can only be welcomed. Reaching as high as 128 yen to the US dollar in Friday trading, it appears to have finally broken out of a depressing downtrend that has seen it drop by about 12 per cent against a trade-weighted basket of currencies, from its highs of last year. From the United States' point of view, this is good news. A stronger yen makes Japanese products in the US more expensive and erodes competitive advantage Japanese manufacturers have over their US counterparts. It also helps drive down the politically sensitive US-trade deficit with Japan, and arguably helps to preserve jobs in US industries. It also eases US-Japan relations. Why has the yen suddenly shown such strength? It is largely a triumph of central bank action. Continued intervention in the foreign exchange market by the Bank of Japan, aimed at ensuring that the yen does not revisit the 69-month highs of 134.4 yen seen last year, appears to be the principle cause. Aggressive speculators, as well as commercial traders, who had maintained long-yen positions since the beginning of the year, appear to have left the market. By happy coincidence the Japanese Government, also seems to be winning back confidence in its commitment to implement economic reforms. The concerted intervention by the Bank of Japan has been done entirely for the benefit of the US. The yen's pronounced weakening against some of the key currencies in Asia, where it conducts as much as 40 per cent of its export trade, is potentially more alarming than its fall against the dollar. The crisis in the region means foreign exchange traders are looking for any opportunity to dump regional currencies in favour of quality assets such as the deutschemark and the dollar. In Asia, the yen is becoming a barometer over the longevity of the crisis. Much of its strengthening in recent days has stemmed from greater confidence that Tokyo will take a more active leadership role in helping to bail out some ailing economies. A resurgence of the yen not only halts any rallies for the dollar to the 135-yen levels, but also cuts short any move to sell regional currencies. A fast rise in the dollar would spur selling across the region, as investors flee into dollars, and it would hamper the delicate reforms that governments such as those of Korea and Indonesia are trying to put in place. However, the yen is by no means safe yet. Foreign-exchange strategists are urging their clients to buy the dips, in readiness to profit from another inevitable rise in the dollar. While they acknowledge that a nascent recovery in Asian currency and equity markets and an increasing likelihood of another Japanese fiscal package has helped the market, belief that such a trend will be maintained is thin. The full fall-out from the crisis in terms of bankruptcies and credit defaults is yet to come through, and concerted intervention, from not only the Bank of Japan but also the US Federal Reserve, a development that could really scare markets, is still seen as some way off. The Federal Reserve will not want to harm its own credibility by intervening at a time when upward pressure on the dollar has not yet been exhausted, and its own monetary policy is accommodative. Furthermore, the benefits of another Japanese fiscal package is also circumspect. There is talk of fiscal package fatigue, following so many ineffective packages in the past, and that any benign impact of another fiscal package, may come only once the effects of that package are registered, and unlikely to come from the announcement itself. Such sentiments mean the dreaded 69-month dollar-yen highs could yet be revisited, and that only faster, more convincing, reforms in the rest of the region could prevent another wave of selling pressure in Asian currencies.
