Risk appetite

With both U.S. and Japanese short-term interest rates near zero, many wonder why the dollar/yen pair is trading near a 14-year low. The answer lies mainly in the current account and budget deficits, the former being the difference in a nation’s total exports and imports and the latter the difference between government receipts and spending.

Japan has a current account surplus of 3.8 percent of GDP vs. a deficit of 4.3 percent of GDP in the U.S. Although both countries have budget deficits, Japan’s imbalance is at 4 percent of GDP, much less than the 8.2 percent shortfall projected for the U.S.

Japan’s superior account balance means the nation’s position as a major provider of global capital will provide a natural return of money to Japan as economic uncertainty rises. In contrast, the U.S.’s status as a major borrower of global capital makes holding U.S. dollars unsustainable during periods of risk aversion, thereby offsetting the currency’s low-yielding status. Consequently, the combination of ultra low interest rates and structural imbalances offers a worst-case scenario for the dollar.