Members login
Yen May Stay Elevated Despite More Easing by BOJ
Written by article default Tuesday, 05 October 2010 09:41
The most pressing issue for the Bank of Japan continues to be the strength in the Japanese currency and the implications for export demand. Encouragingly for the central bank, the Yen has weakened notably against the Euro since the government intervened in currency markets two and a half weeks ago. But it remains stubbornly elevated versus the U.S. Dollar and by proxy the Chinese Yuan. As China and the U.S. are two of Japan’s largest trading partners, this situation remains a concern for the government. While another round of direct currency intervention is not expected today, as long as the Yen remains at these high levels, such action cannot be ruled out.So what can we expect from the BOJ today? There is always the possibility that the bank does nothing, but that is extremely unlikely for it would send the Yen soaring even higher. More likely is for the BOJ to expand its 30-trillion Yen credit program, which is meant to encourage bank lending. An expansion could come by way of an increase in total lending capacity or an increase in loan maturity, with a three to six month extension being bandied about by some market observers. In any event, an expansion of this particular program was announced before, and it did little to stem the Yen’s advance. But that doesn’t mean an expansion wouldn’t be welcome, for the Yen is only one consideration for the BOJ, albeit a major one. After all, the central bank is attempting to support the economy as a whole, not just the export sector.
Another new measure that the BOJ may be considering is the purchase of asset-backed securities tied to small and medium-sized business loans, according to a Nikkei English News report. The same report speculates that the central bank may increase purchases of long-term government bonds, often referred to as quantitative easing by economists.
Regardless of what measures the Bank of Japan pursues, until forex markets see another round of direct intervention, expect the Yen to remain well-bid. Moreover, the most prominent theme in FX at the moment is U.S. Dollar weakness. All Dollar rivals stand to benefit as long as this aggressive trend remains in place; the Yen is no exception.
Click here to learn more about DailyFX.