Fundamentals Catch up with Yen

In hindsight, it is now clear that the Japanese Yen’s dramatic rise in 2008 was mostly due to financial, rather than economic factors. In other words, a decline in risk aversion led to the unwinding of the Yen carry trade and a subsequent inflow of capital into Japan. Unfortunately, the recession and inflated currency have since taken their toll on the Japanese economy, resulting in an annualized 13% contraction in GDP for the latest quarter. The balance of trade has also shifted, to such an extent that Japan actually recorded a trade deficit in the most recent month. Having concluded, for the moment at least, that forex intervention is no longer necessary, the Central Bank has announced plans to deploy some of its $1 Trillion+ forex reserve hoard to help ailing companies.