8/30/2010
By David Silver, Research Analyst

Japan's government took a few modest steps to curb the appreciation of the Yen on Monday, but the tepid response from the market is leaving the government on the hook for possibly doing more. Japan is one of the world's largest exporters, with companies such as Toyota (TM) and Sony (SNE) dependent on the goods it ships overseas. However, with the strengthening yen, their goods become less attractive overseas. Economic Minister Satoshi Arai said, the government "announced the outline of the package today to give the impression that its economic measures and the Bank of Japan's monetary easing steps are properly coordinated." The government may consider additional economic stimulus measures if the yen remains strong.

The 920 billion yen ($10.78 billion) stimulus is part of a two-pronged approach to prevent the surging yen from undermining Japan's fragile, export-led recovery. At an emergency meeting Monday, the Bank of Japan's policy board voted 8-1 to offer domestic financial institutions 10 trillion yen of six-month loans, in addition to the 20 trillion yen in three-month loans it has been offering.

President Obama hopes to double exports by 2015, and a rebound in the greenback (similar to the yen) could put a dent into those goals. A weakening dollar makes American produced goods more attractive to overseas consumers. The U.S. dollar hit a 15-year low of 83.58 yen last week, near its 1995 record low of 79.75 yen. There are hopes that the Japanese government will do more to quell the yen's rise, just as similar calls have been rising for the Obama Administration to do another round of stimulus to help boost the faltering recovery. The Federal Reserve has used "quantitative easing" to help the economy turn, seeing its balance sheet swell to $2.3 trillion, while in Japan, quantitative easing has left the BOJ's balance sheet roughly unchanged at 117.3 trillion yen. The Federal Reserve's balance sheet increased $226 billion year over year (equivalent to the BOJ adding another 19 trillion yen of debt). Hopefully, the next step the Fed (or Administration) takes to help the economy rebound will have a greater effect than those instituted in Japan.  The Japanese government caused a "lost decade" during the 90's and the U.S. is appearing to follow a similar roadmap. 

David Silver
Wall Street Strategies