What Goes Up

Mid August is not often a time of year for significant announcements in relation to global markets, but the announcement of the Q2 GDP figures for many major countries brought significant, if not surprising, news.

China’s economy has been one of the great success stories of the last two decades. So rapid has been the country’s growth that it now has officially eclipsed Japan as the second largest economy in the world on most measures. Whilst this is undeniably a sign of Chinese economic strength, it also demonstrates the current problems in Japan.

The Japanese economy has been one reliant on exports for many years. Companies like Sony and Panasonic are global giants who have long benefited from the weakness of the yen compared to many other major exporting economies. In order to keep exports profitable to the rest of the world, the Japanese government has, from time to time, intervened to keep the yen weak, particularly in relation to the dollar.

Recent months have seen the yen make considerable strides against the dollar, to the extent where the Japanese economy is on the verge of stalling. The dollar, driven down by weak economic data from the US and the spectre of quantitative easing from the Federal Reserve, currently stands at a historically low level against the yen, and no matter how poorly the Japanese economy may be performing at the moment, there is always the likelihood that the US economy will perform worse.

Of course, currency markets have been exceptionally volatile lately, and it wasn’t so long ago that observers were suggesting the dollar would go from strength to strength. Volatility makes it very difficult for traders to take positions, but spread betting companies like Tradefair have seen rapid growth in traders who are looking to the Forex markets to make quick money, and their positions are almost certainly adding, in some measure, to the movements of the markets as a whole.

What happens next is difficult to predict. Japan’s great problem is that it is a solely exporting economy, and no one wants to buy at the moment, it is also seen as stable compared to the US and the eurozone, and remains a major economic power. If it will stimulate exports, expect the Japanese government to intercede, it’s unlikely the Yen will be allowed to remain this high for the foreseeable future.