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Tuesday, March 21, 2006The Yen Also Rises
Is the fundamental imbalance between the USD/JPY about to end?
From the Economist:
...a deteriorating balance on investment income is also pushing up the current-account deficit. Despite its large net foreign liabilities America has until now earned a surplus on investment income because its foreign assets (largely direct and equity investment) earn a higher return than it pays on its liabilities, such as Treasury securities. But net investment income moved into deficit in the fourth quarter. Higher bond yields and lower foreign equity returns than in 2005 are likely to mean a deficit this year, for the first full year since records began in 1960.
Economic theory says that the current-account deficit can be no help to the dollar; and after rising for most of 2005, the greenback has slipped by around 3% against the yen and the euro since November. Last year the dollar was supported by rising American interest rates, but the European Central Bank and the Bank of Japan (BoJ) have now also both started to tighten policy.
The slide in the yen's real exchange rate seems odd, given that Japan boasts the world's largest current-account surplus ($164 billion last year). The explanation lies with Japan's loose monetary policy of recent years, which is now coming to an end. Last week the BoJ said it was ending its policy of “quantitative easing” (ie, printing tonnes of money). It is expected to start raising rates before the end of the year.