Is the Japanese recovery for real?

The surprise economic recovery in Japan, which emerged in the summer of 2003, has taken hold and should continue accelerating into 2005, according to some analysts. That should translate into additional yen appreciation in the months ahead with some forecasts of a break of the psychologically significant 100.00 level in 2005.

“This year, we think Japan will grow at a 4.3-percent pace,” says Jim Glassman, senior economist at JP Morgan Chase. “Their growth numbers have been quite impressive,” Real gross domestic product (GDP) in Japan surged 5.6 percent in the first quarter of 2004, the fastest pace seen since the first quarter of 1991. Analysts do, however, expect a modest slowing in the second half. Second quarter GDP growth surprised on the downside, with a revised 0.3 percent reading. But, for now, most analysts believe that was an aberration, with forecasts in the 2.8-percent neighborhood for the third quarter report, which will be released in mid- November.

Like many other currency spreads in 2004, the dollar/yen has spent several months in a sideways trading range, between roughly 103 and 114. From mid-August to mid-September, that range contracted even further to a 108.75/110.75 range.

However, this consolidation follows a massive move lower from the January 2002 peak at 135.18 to the March 2004 lows just above 103. The primary driver of that yen strength was the unexpectedly strong economic numbers coming out of Japan and, for now, analysts say the yen has already priced in a significant amount of good economic news.

The yen appreciated sharply to around 103 (near early 2004 lows) despite a record pace of massive intervention on the part of the Bank of Japan’s Ministry of Finance (MOF). All throughout 2003, the MOF attempted to slow the pace of yen appreciation by buying U.S. dollars and selling yen.

However, the MOF has been on the sidelines since mid-March of this year. Analysts warn the MOF could reemerge on the scene if the yen begins to strengthen again.