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Japan's in crisis: Why is the yen strong?

By Pamela Boykoff, CNN
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Japanese yen hits record high
  • Despite the disaster in Japan the yen has stayed strong
  • The health's of Japan's economy is based heavily on exports
  • The yen recently smashed through the 80 yen-to-the-dollar barrier

(CNN) -- A spiraling crisis caused by the earthquake, tsunami and nuclear drama has turned into a financial crisis for the world's third largest economy.

In a few short hours, the yen smashed through the 80 yen-to-the-dollar barrier, peaking at 76.25 yen. That was the highest level the currency has hit since World War II.

The health of Japan's economy is based heavily on exports. A stronger yen can wipe billions of dollars off corporate balance sheets.

For example, Toyota loses 30 billion yen, roughly $380 million a year, for each uptick of the yen against the dollar.

Analysts say timing played a big role in the sudden surge. Trade is typically thin around the end of the U.S. trading day and before Asian markets open. The yen, considered a safe bet in times of crises, had been gradually strengthening over several trading sessions. With risk-adverse investors pushing the currency higher, it broke through 80 yen per dollar.

That triggered a flood of automatic buy orders, as traders "who bet on the higher-dollar yen were forced to cut their positions," says J.P. Morgan's Tohru Sasaki. At the same time, the thin trading volumes exaggerated the overall impact.

Also, there is a sense that soon major Japanese corporations will need to bring back boatloads of yen from foreign markets to pay for damages done by the earthquake and tsunami -- a move that would further strengthen the yen.

In September, Japan ruffled feathers when Tokyo intervened in currency markets, selling more than 2 trillion yen to weaken the currency. Nomura security currency analyst Yunosuke Ikeda believes such action may happen again.

"The possibility of intervention is fairly high, if the automatic rebound does not break 80," he says.

Sasaki believes that Japan's government will be put off by the cost of such an intervention. Already highly in debt, the Japanese government has to finance the recovery effort; it won't want to pay weaken the yen as well.