From David Stevenson, across the river from the City

Dear Money Morning Reader,

"What's everyone's favourite currency these days?" asks Neil Shah in the Wall Street Journal. "Quite possibly, the Japanese yen".

The recent fright in Dubai has inspired investors to shift some of their cash out of commodities and shares, and into safer places, such as Japan's currency. This has just driven the yen to a 14-year high against the US dollar.

But while speculators might be fine with a strong yen, Japan's financial authorities aren't so relaxed. They're thinking about intervening in the market to drive down the yen's value.

That might be good for Japan. But what does it mean for the rest of us?

Why currency markets love the yen

Many of the world's major money experts, it seems, recently managed to fool themselves into thinking that everything was OK again on the financial front. Or at the very least, that it was a good idea happily to plough cash into more and more risky places. Meanwhile, fund managers tried to sell us products in ever-more exotic locations such as the Middle East.

A slew of fund launches is always a dangerous sign. Then last week, the Dubai debt debacle hit the headlines. In a nutshell, this is a country that can't service its debts. That's scary on two counts. No one knows either who the creditors are – i.e. who will get hurt most – or where the next problem will crop up.

In short, the financial game has just changed again. So savvy investors are pulling out of risk, and moving into safe havens. Hence the Japanese yen being heavily bought by foreigners.

Sure, it may not seem like the best global refuge – the Japanese government is hugely indebted. But as Ian Campbell says on Breakingviews.com, "with the US dollar plumbing the zero interest rate depths, pounds printed like decorated toilet paper by the Bank of England, the euro overvalued and the Chinese renminbi inaccessible, the yen is the world's closest thing to a safe haven". Japanese investors are bringing their cash back home too, because they reckon they can get a better return on their money there than abroad.

But watch out when central banks react

The latest buying burst has sent the yen to a 14-year high against the dollar. That's bad news for Japan's exporters, as it makes their goods more costly to overseas buyers. Japanese exports are already down more than 23% compared with last year, and although the pace of decline has slowed, more yen strength will only make matters worse again. With the world's economic recovery looking anything but assured, that would be the last thing the country needs.

No surprise, then, that Japan's financial authorities are freaking out about the potential damage that a further surge in their currency could cause. And there have been a lot of rumours circulating of 'intervention' to drive down the yen's value. In other words, the authorities would supply more of the currency into the foreign exchange (forex) markets to lower the price. There's also been talk of "a G7 joint statement on currencies to cool the yen's rally", according to Reuters.

Should we take this seriously?

Well, we've heard politicians and central bankers talking currencies many times before. But what they say and what they do are two completely different things. US Federal Reserve boss Ben Bernanke was telling us a couple of weeks ago that he wants to see a strong dollar. Yet somehow that doesn't quite fit with the Fed printing oodles more greenbacks, i.e. increasing their supply, over the last year.

The Japanese, though, do have form in backing up their words with deeds - they last intervened in the forex markets in March 2004.

So what would happen if they – maybe along with the other major countries – now tried to force down the yen's value, probably by selling it and buying dollars?

Two things. First, and most important, the dollar would probably rise across the board. The buck has been in broad decline since early March, losing some 16% of its overall value over that time. Watch the dollar, as the dollar has dropped, virtually every 'risk asset' has risen. So as Dominic said, "a reversal in the seemingly ever-falling dollar could change everything. Stock markets, commodity markets, gold, junk bonds, the euro – you name it – could all reverse with it".

In other words, financial markets may soon have a lot more to worry about than just Dubai and its fallout. We could be on the verge of a major share shakeout.

Why? Because what's good for Japan won't be at all welcome in the rest of the world. Every country will be battling even harder for whatever business there is around. As we've already suggested, investors would then focus much more on the attractions of 'defensive' stocks that don't need economic growth to make their money – and that have been largely left behind in the recent rally.

The Japanese share to own now

Second, the main area to get a boost would be the Japanese export sector whose profits have been hard hit by recent yen strength. My colleague Cris Heaton has identified video games giant Nintendo (JP: 7974) as a very out-of-favour stock that's likely to benefit from a weaker Japanese currency. Most of its sales are in dollars and euros, which would then be worth more in local terms, while many of the company's costs are in yen.

Cris reckons the US-listed American Deposit Receipt (US: NTDOY) is an easier way of buying the stock, as each ADR (currently $31) represents a one-eighth interest in a Nintendo share, while the market is highly liquid. Of course, a stronger dollar would depress the ADR price, because the yen would be worth less, but the boost to the firm's profits should more than offset this. H

Until next time,

David Stevenson

Associate editor, MoneyWeek UK

Turning to the markets...

The JSE all share index advanced 1.42% yesterday. The gold mining index gained a huge 4.47%. Resources added 2.17%. Banks and financials grew 1.05% and 0.63% respectively. Industrials bounced 0.99% and the platinum mining index jumped 0.85%.

London's FTSE100 climbed 2.34%. The Dow Jones collected 1.23% and the Nasdaq closed up 1.46%.

Tokyo's Nikkei traded flat, up 0.01%. Hong Kong's Hang Seng added 1.28%.

Brent crude is currently trading at $79.59 per barrel.

Spot gold's trading at $1,215.07 and platinum was last quoted at $1,495.50.

And here's how the rand is performing against the major currencies:
R/$7.28
R/₤12.09
R/€11.00