G7 ignores weak yen -- Good for dollar strength
February 14, 2007
The G7 Finance Ministers were expected, in their meeting February 9-10th, to deliver a strategy that would support the yen to dollar exchange rate, which has been losing value in recent weeks as Japan’s economic recovery seems to be stalled. The yen declined in value slightly after the ministers made no mention of its recent weakness.
Instead, the G7 Finance Ministers:
What a weak yen to dollar exchange rate means:
Japan’s economy is not growing as quickly as industry analysts had expected. As a result, the Bank of Japan is not expected to raise interest rates any time soon, as it is afraid of sending the economy back into the 10-year deflationary cycle from which it is just emerging. A large part of Japan’s economy is based on the metals, mining and shipping industries, which rise with commodities prices. Since the price of oil has been declining since October, so has inflation and economic growth in Japan. This has also kept the BOJ from raising rates as expected.
In addition, market watchers are skeptical of Japan's new Prime Minister Shinzo Abe’s ability to manage the economy, thus making it even more difficult to foster a pro-investment climate.
As a result, the yen has decreased in value since last May, when traders only needed 110 yen to purchase a dollar. As as February 14, 2007, traders needed 114 yen for every dollar.
Action steps:
Take advantage of the yen’s current weakness to increase your holding of Japanese sector mutual funds, if your financial advisor agrees. These funds will increase in value in the long term, since Japan’s economy is basically growing, although more slowly than was thought last year.
Source: University of Toronto G-8 Information Centre, “Statement by G7 Finance Ministers”, February 10, 2007.
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