As Japanese economic growth slows, focus turns to currency

The growth rate of Japan’s economy slowed unexpectedly in the second quarter – and with China’s gross domestic product expanding by more than 10 percent, the latter is believed to have supplanted the former as the world’s No. 2 economy.
China has enjoyed surging economic growth, even when the developed world was suffering through the recession. The country’s blistering expansion should continue: Goldman Sachs chief economist Jim O’Neill believes China’s economy will be larger than the U.S.’ in 2027.
Japan is not faring as well. The nation’s GDP expanded by just 0.4 percent, on an annualized basis, in the second quarter – much slower than the 4.4 percent annualized growth it posted in the first quarter.
Ironically, though, currency investors have looked favorably on the yen of late. It surged to 15-year highs against the dollar last week – investors lost interest in the greenback because of the U.S.’ economic slowdown – and it has risen so fast that Japanese exporters are asking finance officials to intervene in the currency markets.
There is a precedent for currency intervention: The Swiss National Bank bought euros during the second quarter when the Swiss franc was rising quickly. Stronger currencies hurt companies by reducing their overseas revenue; by intervening, the SNB helped Swiss export firms like Swatch.
Japan has a much larger export sector than Switzerland, though, and currency intervention may be more acutely needed in Japan than it was in Switzerland. Already, Japanese companies are feeling the pain: Their share prices slumped last week on concerns about the stronger yen’s impact on revenue.
But Finance Minister Yoshihiko Noda indicated that intervention wouldn’t occur in the near-term. "We will monitor economic conditions carefully and respond appropriately," he said August 12.
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