The yen is strong – almost too strong – to allow its companies to compete with foreign companies. A stronger yen means exports are more expensive, and many firms are cutting back on their Japanese purchases or looking for other suppliers.
Japanese Stocks Cooling
Japanese stocks have cooled from their highs, but the markets as a whole are sound; analysts expect the stock market will make very little advances from its current levels. Reduced international trade greatly affects publicly listed companies – which are generally bigger and do substantially more business overseas.
Hurting an Already Beaten Sector
A high priced yen is placing downward pressure on the automotive industry, namely Toyota, which must price its exports in yen for accounting and earnings reporting purposes. This drives a nail right through an industry that's already feeling the pinch, especially in markets like the United States, where all manufacturers are selling fewer cars.
Flu Affecting Asian Markets
The swine flu had an immediate adverse affect on Asian markets. Investors remember the SARS epidemic and the economic outcome it had on Asian trade. Should the flu continue to spread, the Asian markets are sure to be affected differently than the rest of the world simply due to recent outbreaks of other communicable diseases.
Exports Are the Most Important
Exports are the single most important element of business for any country. To sustain a greater standard of living, countries must exchange goods and services to nations that can use them. If Japan's exports struggle due to the steadfast yen, this does not bode well for the country's long-term standard of living.
Could The Central Bank Start Easing?
Japan is one of the few nations to take little action against deflation. Japan has battled its own lost decade to deflation and is now starting to show some growth as nations expand their money supply. Greater purchasing power is important to Japan, but the nation also has a large quantity of debt to service, all of which is paid in yen. A weaker yen helps pay more of the debt off, but a stronger yen means a better standard of living. Investors should expect very little further action from Japan, if any.
Get Out of Japanese Bonds
Investors, at this point, should have no interest in Japanese bonds of any type. As the yen continues to strengthen, the economy will soon feel the pinch, and the currency will tumble, devaluing investments made by foreign investors. If anything, invest in the areas that have the weakest currency to the yen and favor those of which are geographically located in such a way that they can profit from exports to Japan.