Forex Investment and Currency Trading

Investors are paying a lot of attention to a WSJ article in which Hirohisa Fujii, a candidate to become Japan’s finance minister, is quoted as saying “… I think it’s a wrong policy for a nation to just weaken its currency to boost its exports …There could be cases where some steps would be taken when there are abnormal, speculative money flows. But in principle, we must not take such action.” Some interpret the comments as suggesting that the DPJ will pursue a strong yen policy. However, much of the discussion seems to abstract from whether a strong yen is desirable in itself, or as a consequence of domestic policies that succeed in raising demand, productivity and the return to capital.

Without the other policies in place, a stronger currency may just weaken exports and yield the same mediocre domestic demand with a higher import component. If a strong currency artificially props domestic demand by increasing the demand for imported goods, the outcomes may disappoint because the domestic value added component in this additional demand will be limited. Importing a lot of consumer goods from the rest of Asia with a low domestic value-added content will not contribute to narrowing the output gap or ending core deflation. The yen has been steadily appreciating against the CNY since the beginning of the recovery and is stronger than at any period since the yuan moved off its USD parity in 2005 (other than the period of intense risk aversion at the end of 2008 and beginning of 2009).