The Yen and the Dollar

The value of foreign deals struck by Japanese buyers in 2010 has nearly doubled to $21.77 billion. This has been induced by a strengthening yen. The yen has strengthened even though the Japanese economy remains lackluster. The strong yen is good for Japanese companies looking to acquire foreign companies but bad for companies trying to export to other nations. With the higher yen, Japanese companies flush with cash can acquire local foreign businesses fuel growth more quickly than building their own businesses abroad. Acquisitions of companies with strong domestic demand, such as retail and food sectors, have been particularly attractive. Nippon Telegraph & Telephone Corp. reached a deal to buy Dimension Data Holdings PLC of South Africa for $3.1 billion, making it Japan's biggest deal yet in Africa. Kirin Holdings Co. in July agreed to acquire a stake in Singaporean brewer Fraser &Neave Ltd. For nearly $1 billion, and JFE Holdings Inc. agreed to acquire a minority stake in India's JSW Steel Ltd. For more than $1 billion. In March, Japan's AstellasPharma Inc. purchased OSI Pharmaceuticals Inc. of Melville, New York for about $4 billion in the biggest deal of the year to date.

A strong yen makes Japan's exports-a cornerstone of the domestic economy-less competitive overseas. That puts pressure on policymakers to take immediate and extensive action to rein in the yen's strength. But the ability of Japanese's companies to acquire foreign companies puts pressure on policymakers not to take action. In addition, the same factors pushing the yen up, also are pushing Japanese interest rates down, reducing the government's borrowing costs at a time when its massive public debt is under scrutiny.

Exercise Questions:

1.) What does a strong yen mean?

2.) What could cause the yen to strengthen?

3.) Why might Japan not want a strong yen?

4.) With the various sectors fighting each other in order to influence Japanese policy-makers, what is likely to happen to the yen?

5.) Why was the yen strengthened even though the Japanese economy has been in a very sluggish growth pattern for a decade?