Overview, Knowing The Japanese Yen, Factors Affecting Yen

Overview of the Japanese Economy

Japan is the leading economic power in Asia and its currency is 'Yen'. The economy of Japan is ranked 4rd in the world and its GDP is valued at about US$3.867 Trl (2005). Japan is a highly advanced country technologically, and exports a significantly large number of Automobile & Electronic goods, worth more than US$500 Bln per annum. Manufacturing alone contributes about 20% to the GDP of Japan.

Interestingly, Japan is also heavily dependent on Raw material imports for its Manufacturing sector. Of late, owing to low prices, Japan has been importing in a big way from China. The major trading partners for Japan are US, China, Hong Kong, Taiwan & South Korea and it has consistently maintained a positive trade surplus.

Japan had undergone a severe Economic Crisis in the recent past and has partly recovered from its aftermath. It was caused due to the Real Estate bubble burst, which forced several banks & financial institutions into a state of bankruptcy due to non-recovery of loans. Real Estate builders & agents had availed of these loans at better times in the past - when the economy had been growing at a very rapid rate, which had attracted a lot of Foreign Investment & consequently raised the Real Estate prices by leaps & bounds.

The banking sector has still not recovered from that crisis and the Japanese government frequently comes to its rescue at crucial times by injecting fresh capital from time to time. Japan is one of the few countries in the world, which quite frequently experiences deflationary conditions. Another major cause of concern for the Yen is the continuously deteriorating debt level at about 145% of the GDP. This skyrocketing public debt has virtually put a full stop to its economic growth & brought it to the verge of a liquidity crisis.

The Regulatory Authority - Ministry of Finance & the Bank of Japan

The Ministry of Finance (MoF) and the Bank of Japan (BoJ) are the key monetary policy makers in Japan. The MoF is the director of Foreign Exchange Interventions and the BoJ implements its orders. Hence, though theoretically BoJ has 'complete' independence, it is the MoF, which calls the shots for all practical purposes.

The Policy Board of the BoJ comprises of the Governor & Deputy Governor of the Bank and 6 other members. It is important to look out for the Monthly Economic Report and Press Release Statements of the Monetary Policy Board. They provide vital information regarding any possible fiscal policy changes in the near future.

Since Japan relies very heavily on its exports for its economic survival, the MoF has intervened umpteen number of times to prevent any appreciation of the Yen, as a weak Yen tremendously boosts exports.

Forex Markets react sharply to any comments on the Yen by the MoF due to its long history of interventions. The BoJ implements the monetary policy primarily by: " Controlling the Overnight Call Rate through Open Market Operations: It is the Short Term Interbank Interest Rate. The BoJ manages Liquidity & implements Monetary Policy Change by changing this Rate.

Overview, Knowing The Japanese Yen, Factors Affecting Yen