Tumbling stock markets and falling currencies are causing global concern, but the Japanese yen is generating high anxiety for rising too much. The yen surged as much as 10 percent against the dollar last week. In the last month, it has gained an astounding 34 percent against the euro.
One reason the yen is rising is investors’ flight to quality. Another reason, many economists say, is the sudden end of one of the world’s biggest easy-money schemes, the so-called yen-carry trade.
The yen’s rise helped hammer Tokyo’s beleaguered stock market Monday. Share prices hit a 26-year low and are down 50 percent this year. A strong yen makes Japanese products more expensive during a recession in Europe and North America, hurting the profits of Japanese exporters.
Finance ministers from the world’s seven wealthiest nations issued a joint statement as the Tokyo market sank, saying they were “concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability.” But the yen remained strong as investors signaled their doubt that governments would intervene to stop the yen’s gains.
Christine Lagarde, the French finance minister, confirmed as much in an interview with Bloomberg News.
The yen’s rise is owed, in part, to its status as a safe haven — in turbulent times, investors move money into the currency because Japan is the world’s largest economy after the United States, and its banking system has limited exposure to the subprime crisis, even though it faces recession.
But currency analysts say most of the yen’s recent gains are because of the abrupt end of the yen-carry trade.
For much of this decade, Japanese and foreigners alike borrowed money in Japan, where interest rates were very low and money was therefore cheap. They invested that money in higher yielding assets across the world, from home loans in Budapest and Seoul to equities in Mumbai.
This turned Japan, with its $15 trillion in personal savings built up by the nation’s chronic trade surpluses, into a provider of low-cost capital for the rest of the world.
No one knows for sure how large this outflow of yen was.
Much of the yen-carry trade took place beyond public scrutiny, in the form of currency options or other types of derivatives trading. Most analysts agree its size was in the hundreds of billions of dollars, with some estimating it reached well more than half a trillion dollars. As the yen-carry trade grew, currency analysts warned it was a bubble of cheap credit, which one day would burst.
Now that day has come, say currency analysts and economists. Investors have been unwinding their yen-based loans as part of a panicked flight from risky assets — like Budapest home loans and Mumbai equities — and into safer havens like the yen and the American dollar, which is also rising against the euro and British pound.
The prospect of global recession has also led central banks in many countries to cut interest rates, reducing the appeal of borrowing in Japan: South Korea cut interest rates by three-quarters of a point Monday, its biggest one-day move ever.