Japan’s earthquake and the yen

U.S. Federal Reserve Board Chairman Ben S. Bernanke has called Japan a country suffering from a combination of many economic problems. In the 1980s, Japan was in the grip of equity and land speculation fever. After the Japanese government raised interest rates in 1989, however, the country’s stock and property market bubbles suddenly burst. Despite numerous stimulus measures to lift itself out of recession, the country suffered a “lost decade.” It showed signs of coming out of its prolonged economic slump last year, but was hit by Friday’s massive earthquake.

The world’s third-largest economy faces another economic crisis due to the catastrophe. The explosions at a nuclear power plant have forced Japan to implement planned power blackouts for the first time since World War II. Major industries such as oil refining and steel manufacturing have also suspended operations. If traffic and communications are disrupted and retail business hours are restricted, the Japanese economy will further weaken. Nouriel Roubini, an economics professor at New York University who predicted the U.S.-trigged global financial crisis in 2008, compared a crisis to a hurricane. A crisis is predictable like a hurricane but the fate of the Japanese economy in the wake of the massive natural disaster will defy prediction for the time being.

When the 1995 Kobe earthquake struck, the yen was strong. With major Japanese investors withdrawing their overseas investment to raise funds for recovery, the yen remained strong for almost two months. The value of the Japanese currency fell afterwards, however. Shortly after the latest earthquake, the yen`s value rose to 80.58 against the U.S. dollar with Japanese companies operating overseas and investment funds converting dollars to yen. The patriotism of the Japanese people has apparently caused the yen’s value to rise. The yen began falling, however, as the Japanese government showed signs of injecting 18 trillion yen (220 billion dollars) into the market. This means the yen is unlikely to remain strong as it did after the Kobe earthquake.

The Korean economy is sensitive to the yen’s fluctuations. With many Korean products competing against those of Japan, a strong yen can help Korean exports rally but a weak yen does the opposite. A strong yen puts Korean importers of Japanese parts and materials at a disadvantage because the rising yen’s value increases their cost. Small and mid-size companies and the self-employed with yen-denominated debts will favor a weak yen over a strong yen. Neither side wants to see the yen fluctuate, however. The yen will stabilize only if Japan recovers from its devastating earthquake.

Editorial Writer Park Yeong-kyun (parkyk@donga.com)