Post-quake Risk to the Economy

The value of the yen steeply rose against the U.S. dollar last week when the stock market was in the doldrums — the Nikkei Average Index fell below 9,000. On Thursday, the yen shot past the record ¥79.75 to the dollar set in April 1995, peaking near ¥76. Joint market intervention on Friday by Japan, the United States and Europe somewhat helped to alleviate pressure on the yen.

It is believed that speculative investors bought the yen thinking that Japanese insurers and exporters would dispose of overseas assets and convert them into yen to pay costs of the March 11 earthquake and tsunami. Given the damage caused by the natural disaster and the crisis at Tokyo Electric Power Co.'s No. 1 Fukushima nuclear power plant, the yen was expected to fall against the dollar; instead, the reverse happened.

A steep rise in the value of the yen will inevitably weaken the competitiveness of Japanese exporters, contribute to the hollowing out of Japanese industries and cost employment opportunities in Japan. The government and the Bank of Japan should take necessary additional actions promptly to prevent speculative investors from ruining the Japanese economy.

Up until the March 11 earthquake and tsunami, the Japanese economy had been on a path of recovery. The disaster not only affected production activities in the affected region but also hampered product distribution.

Carmakers were forced to temporarily stop factory operations nationwide because of the difficulty in getting parts. Other manufacturers face a similar situation. Rolling electric power outages by TEPCO, to cope with the power generation crisis, has further complicated the situation for manufacturers.

Facing competition from manufacturers of emerging economies, Japanese carmakers and electronics makers are trying to move their production bases overseas. A strong yen will accelerate this move. Midsize and small enterprises that do not have overseas factories will be forced to cut back on production, which will lead to higher unemployment. The government should further deepen cooperation and coordination with developed and emerging economies so that the Japan's economy does not stall.