From a terminological point of view, when there is a floating exchange rate, we use terms appreciation and depreciation to characterize changes in the currency exchange rate. When the price of the currency increases, it appreciates and, when the price of the currency decreases, it depreciates. Exchange rates between major international currencies of the moment – dollar, yen, euro – are floating exchange rates.

Essential weakening of the yen

The strength of the yen threatens Japanese growth in comparison with the world currencies. Japanese growth has finally been rather strong, but it ends on a result annualized + 1.6% lower. Quarterly data were relatively volatile, which marked an acceleration of the economic dynamics.

The Japanese economy thus closes the year on a less positive note, however, lengthening the current growth of yen rates to international currencies phase by recording its eighth consecutive quarterly increase.

Over the next few months, both yen and world currencies posted strength for several months. Indeed, we should attend, at the beginning of this year a cyclical slowdown in Japan caused, in particular, by the rise in the yen against the dollar and its record rates.

The unexpected strength of the yen clearly threatens the recovery of exports and corporate profits, which have been important drivers of the recovery cyclical. The Japanese economy has, in fact, been supported by a favorable environment for the development of its exports and by a recovery in investment.

The Japanese economy may well miss quickly support a weak currency. At the moment domestic demand needs more than ever confidence as well as real wage growth and household disposable income. Growth of corporate profits was expected to question the prospects for consumption rising.

Yen-implied threats to Japanese economy

The rise in the yen and yen record rates is therefore a significant threat to the Japanese economy – not in a position to face an appreciation of its currency.

Without a doubt, awareness of the importance of this factor did not mean its disposal to counter the negative effects of a strong currency like Japanese yen, than those already put in artwork. This situation is relatively worrying, because:

·         Questions Japan’s prospects for the next quarters.

·         In the absence of a next weakening of the yen we are considering a more uncertain economic development for Japanese economy.

·         GDP growth may not be as strong supported by external demand and suffer, at the same time, a slump in demand interior.

The hopes of a cyclical yen and world recovery are therefore based on a reversal of trend in exchange rates and a net weakening of the yen.

This transmission of income is always hoped to boost inflation and consumption. If these conditions have not yet have been brought together, they now, in our view, have better chances to come true because of the record yen rate before. But one weakening of the yen certainly remains an indispensable condition.

The return of uncertainties related to the results of the quarter will not be immediately countered by

leading indicators, which are still relatively morose. The Japanese economy, and thus yen rates to world currencies, is growing, but hesitation is always present and vigor, probably temporary, the yen does not reassure. The comeback exports and external demand, partly supported by the international business cycle more favorable and by growing investments in Asia, had a noticeable effect on industrial production,

In contrast, industrial production again showed extreme volatility in January, causing a net correction of the pace of growth annual increase. The yen temporarily regains its character currency refuge. The Bank of Japan still has not much more leeway to try to reach his goal – record yen inflation rate. It does not modify its analysis of the economic conditions and continues its low rate monetary policy of monetary injections.

There are still hopes that the Japanese economy will be sufficient to allow an increase in inflation towards the desired objective. The short-term yen interest rate target remains unchanged. If there will not be changes in the policies, which should remain an important factor in the future decline of the Japanese currency.

So we are still of the opinion that improving fundamentals will not have an impact on the yen record rates, which will certainly remain abandoned by investors, because of an environment of interest rate totally unfavorable. Government policy therefore always seeks to weaken the yen, while yen to dollar rate differentials should increase and penalize the Japanese currency.