Why A Strong Yen Is A Bad Thing

Here’s why you should care.

CNN.com: The yen has surged 13% against the dollar so far this month, even as the dollar has strengthened against the euro. But a stronger yen is wreaking havoc on the world markets as its feeds more global recession fears.

Japan’s Nikkei fell to a 26-year low Monday, helping to drag down stocks in Europe and the United States.

The yen’s rise against the dollar is a big cause for concern, feeding on itself because of what is known as the carry trade. Investors often borrow yen to buy other higher-risk investments. But when those investments fall in value, investors have to sell them and rush back into the yen to cover their positions.

Since Japan is such a big exporter of goods, a more robust yen hurts profits for Japanese firms as sales from abroad get translated back into yen. And that’s on top of the financial pain caused by weakening global demand.

So the more that the yen climbs, the worse Japan’s stock market will probably do, which tends to cause a ripple effect on European and U.S. exchanges.

“The Nikkei is heavily influenced by the manufacturers and exporters, and those are the companies that are going to get hit by the appreciation of the yen. This is very bad news for Japan,” said Chris Probyn, chief economist with State Street Global Advisors.

And, in turn, bad news for us.

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