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Wednesday, 17 July, 2002, 05:45 GMT 06:45 UK
Yen's rise spells trouble for Japan
A man walks past an electronic board indicating the appreciating yen
The yen's climb is the last thing the economy needs
Japan's currency is strengthening inexorably against the dollar, sparking worries that the rise could stamp out any sparks of recovery from the country's decade-long downturn.

Since the beginning of 2002, the yen has gone up almost 15%, rising from about 135 yen to the US dollar to less than 116 on Wednesday.

Sony is not a buy until the yen stops its climb

Yoshihisa Okamoto
Fuji Investment Management
The relentless appreciation to a 17-month high comes despite concerted action from the Bank of Japan, which has got its colleagues in Europe and the US to join it in selling yen and buying dollars to stem the tide.

But so far the action has had little effect, and exporters - a category which includes most of Japan's most famous corporations - are worried as a result.

Dollar in decline

The trouble with the yen is not so much a question of Japan's economy becoming more popular with investors as a case of the dollar finally losing its allure.

The rash of corporate scandals sweeping the US has combined with worries about the strength of the recovery there and weakening consumer confidence.

The result is that overseas investors are not putting their money in the US as once they did.

A new memory stick recorder from Sony
Sony is just one exporter in the rising yen firing line
Attempts by Federal Reserve chairman Alan Greenspan to calm things by stressing the underlying strength of the US recovery have come to naught.

Aside from Japan, Europe has also seen its currency strengthen sharply, again on dollar weakness rather than euro strength.

Looking for the silver lining

Not everyone is so concerned about the knock-on effects.

In the regular monthly economic outlook released on Wednesday, the Bank of Japan - which has now intervened seven times this year - upgraded its assessment for the fifth straight month, saying the economy had practically levelled out.

"Japan's economy, despite continued weakness in domestic demand, has almost stabilised as a whole, with an increasing upward impetus from exports and production, and an improvement in corporate profits and business sentiment," it said.

But as well as pointing out the risk of unemployment and of weak capital spending, it issued a veiled warning about the danger from the yen.

"It should be heeded that further destabilisation in the foreign exchange and financial markets at home and abroad would easily exert a negative influence on the economy," it said.

Exporters in trouble

What that means is that companies such as electronics giant Sony are struggling to cope with the fact that their prices overseas are now almost one-sixth higher than they were in January.

In Sony's case, the pressure has driven its shares down to a low for the year, falling 5% just on Wednesday.

For every one-yen drop in the value of the dollar, Sony - two-thirds of whose sales come from exports - says it loses 8bn yen in operating profit.

"I think Sony's decline can be attributed mainly to the rise in the yen," said Fuji Investment Management senior vice-president Yoshihisa Okamoto.

"Sony is not a buy until the yen stops its climb."

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