Eurozone Worries Crushing Japanese Confidence

By Sam Mattera
Benzinga Guest Writer

On Thursday, in a survey released by the Bank of Japan, confidence among Japanese manufacturers fell more than anticipated.

Analysts had forecast a reading of negative 2, while the actual figure was negative 4. The reading may be seen as fairly significant, as Japan’s economy remains dependent upon its manufacturing and exporting sector.

Japan’s Nikkei dropped over 1.60% in Thursday’s trading, as Japanese investors may have become concerned over the future prospects of Japan’s economy.

Investors in the US appeared to brush Japan’s struggles aside early Thursday morning, as futures rallied into the open. Surprising positive data coming in from Europe and a seemingly improving jobs picture in the US may have set a positive mood among US equity investors on Thursday.

In the Japanese survey, businesses cited uncertainty due to the Eurozone situation, a strong yen, and supply chain issues due to flooding in Thailand.
The first two issues that the businesses have may be largely interrelated – Japan’s yen may have strengthened because of issues in the Eurozone.

A strong yen may cut into the confidence of Japanese exporters, as it would make the price of Japanese goods more expensive to foreign consumers, and therefore may hurt demand.

The Bank of Japan has intervened a few times this year in an effort to drive down the value of the yen.

Following the tsunami disaster in March, the Japanese yen rose sharply. Insurance companies may have been forced to dump assets to raise cash, leading to a sharp increase.

Back then, central banks around the world worked in tandem to drive down the value of the yen. Yet, the yen rapidly bounced back in the following months as the situation in Europe deteriorated.

Then, the Bank of Japan intervened again—this time unilaterally—in October. Other central banks, perhaps worried about the value of their own currencies, did not offer support.

If Eurozone issues continue to worsen, the yen may stay strong. However, if the Eurozone situation improves, funds may shift out of the yen back to the euro, weakening the yen and improving the environment for Japan’s manufacturers.

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