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Stephen Jen: Why is the yen weak?

April 6, 2007
By Ken Worsley


Managing Director and Chief Currency Economist Stephen Jen of Morgan Stanley’s Global Economic Forum takes on the issue of the weak yen in an article published today entitled Big Potential for Further Japanese Retail Outflows. Mr Jen sees two schools of thought concerning the current weakness of the yen: The first (which he says is predominantly held outside Japan) is that the so-called ‘carry trade’ is contributing to a weak yen. The other option, which Mr Jen sees as being more common within Japan, is that low interest rates are keeping the yen weak. As he puts it:

I believe that the JPY is weak partly, not wholly, because of Japan’s low interest rates. What has been a key development since late 2005 is a gradual decline in Japan’s ‘home bias’ (i.e., its long-standing preference, possibly driven by cultural or risk preferences in the past, for JPY-denominated assets). The positive interest rate carry has encouraged this structural shift, but the structural shift would probably have occurred even if Japan’s interest rates were higher than they are now, I suspect.

This is the ‘capital outflow’ story I’ve tried to emphasize to clients in recent months, to try to draw them away from the simple ‘JPY carry trade’ fad. While ‘JPY carry trades’ have indeed been a powerful force in keeping the JPY under-valued, structural capital outflows are also critically important. Further, I believe that the latter is a bigger story — not only because Japanese flows into foreign equities may have accelerated, but also because a similar trend may be occurring in Korea right now and may occur in China in the coming years.

Read the full article, Big Potential for Further Japanese Retail Outflows, at the Morgan Stanley Global Economic Forum.

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Comments

2 Responses to “Stephen Jen: Why is the yen weak?”

  1. Mike on April 10th, 2007 12:20 am

    There’s something I don’t get. I thought that the low interest rates were being criticized by the Democrats in the US…they would be outside Japan, right? Or do they not count? And…what is the link between interest rates and exchange rates?

  2. Satch on April 11th, 2007 6:09 am

    The yen is weak because that is how it’s valued by a free, fair and open market. End of debate. We know full well that the weak yen supports Japanese exporters, but how is that evidence for intervention? The arguments I’ve heard for that are weak at best, politically motivated at worst.

    Interest rates? There’s never been an historical relation. Low interest rates bring about the carry trade, and that might suppress the yen as money flows out - but that closes the loop: the low yen is what the (Western) market wants.

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