Blog #8 - Yen hits record-high against US dollar as Nikkei falls

Bill Spartin
3/18/11
4:08 AM

On Thursday the exchange rate of yen to US dollars reached a record high for Japan at 76.25 yen to 1 USD, but fell back down to 79.14:1 by the end of the day.  At the same time the Nikkei index dropped another 1.4% due to the concerns raised about the impact that a strong yen will have on exporters.  The recent market fluxuation is a result of the natural and nuclear disasters that have been occurring in Japan.  A rise in the price of the yen only means one thing: the complete undermining of the competitiveness of Japanese exporters.  Analysts credit the strengthening of the yen to the increased amount of currency to repatriation of assets and foreign currency by Japanese insurance firms.  Shortly after the large earthquake Japanese investment flows were interrupted causing a appreciation in the currency.  G7, a group of the seven wealthiest nations in the world including USA, Japan, and the UK, are meeting early Friday morning Japan time to discuss what to do about the current economic situation.  G7 will most likely give Japan "the go-ahead" to intervene and stabilize the yen.  Since the earthquake the Nikkei index has fallen a total of 14%.

Essentially what all of this means is that due to natural disasters the value of the yen is increasing.  Because of the large earthquake and the nuclear reactors melting down Japan has seen a disruption in its cash flow, causing deflation due to decreasing amounts of currency.  With the rise of the price of yen to the USD comes an obvious problem.  Japan is able to compete in the world economy because the cost to make things and provide services is so cheap on the USD.  When that ratio changes the price of doing business changes as well.  A higher exchange rate of USD to yen will mean lower costs which is enticing for businesses, while a lower exchange rate will mean greater costs of business in which case they wouldn't have the lowest bid.  G7 is meeting soon and they will discuss and advise Japan on whether or not to intervene in the current economic problem but printing more currency therefore intentionally causing inflation.

http://www.bbc.co.uk/news/business-12768098