The yen closed at 78.74 per dollar on March 17 following the earthquake and tsunami on March 11; a similar strengthening occurred with respect to the euro also at this time. The yen was trading around 82 yen per dollar prior to the natural disaster. The strengthening of the yen led to a massive coordinated intervention of central banks in currency markets by March 18. The intervention was successful in bringing about a depreciation of the yen and the yen/dollar exchange rate closed at 85.26 on April 6.

However, as Chart 2 shows, it was a temporary achievement and the yen continued to strengthen thereafter. On August 1, the appreciation of the yen reached a new level, with the yen/dollar rate at 76.87 and 109.14 yen vis-à-vis the euro (see Chart 2). The yen has also strengthened vis-à-vis China’s renminbi (yuan) and the South Korea’s won (see Chart 3). The Bank of Japan intervened today; as of this writing, the yen was quoted at 78.85 per dollar, implying that the intervention is successful. But, if recent history is a guide, the probability of a sustained depreciation of the yen is small.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com

Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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