Got Nothing on Yen, Baby

For the past couple of weeks, USDJPY has been treading in territories untouched since 1995. The yen’s appreciation has caused Japanese officials to become more and more concerned. Is there no stopping the yen?!

Jawboning doesn’t seem to have any effect on the juggernaut currency anymore, as traders have repeatedly bought it up. Prime Minister Naoto Kan and the Ministry of Finance have been spewing plenty of intervention threats lately, but to no avail. The only thing they’ve managed to accomplish with their jawboning is to prove they’re all bark and no bite.

After seeing their threats fall on deaf ears, it’s no wonder the Bank of Japan (BOJ) has resorted to expanding one of its lending programs, which can be considered form of easing. Earlier this week, the BOJ pumped in another 10 trillion yen into the supply of fixed-rate loans. But even this failed to curb the yen’s strength, as it has been romping through the markets this week!

Heck, even weak economic data doesn’t seem to faze yen bulls. Japan posted a sorry 0.1% GDP growth in Q2 2010, but their currency hardly broke its stride! What gives?

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As I’ve said time and again, with the stinky smell of uncertainty still lingering around, safe-haven currencies like the yen have been gaining. People don’t know what’s gonna happen next, whether we’re going to hit a double-dip recession or if the economy will suddenly take a turn for the better. Instead of taking their chances with crap (oops, I mean, higher-yielding) currencies like the euro, they decide to just chill out with less risky ones.

But why is the yen still killin’ it against the Greenback? Isn’t the US dollar the king of the safe-havens? After all, it is the world’s reserve currency!

Ahhh… All good questions, my young padawan. While the dollar does hold the “World’s Reserve Currency” title, it ain’t enough to overcome some of the US economy’s glaring weaknesses. Recent economic data hinted that the US may be headed for a double-dip recession. With a weak US fundamental outlook, investors have sought refuge in better safe-haven alternatives like the franc and yen.

So risk aversion’s got the yen’s back for now, but until when can it keep this up? Central bank intervention still seems unlikely for the meantime but the tide could turn after Japan’s elections mid-September. You see, a long time ago, the Democratic Party of Japan vowed to keep interventions at bay and focus on reviving the Japanese economy via domestic demand. Now that the Prime Minister’s seat is up for grabs, the contenders are including proposals for weakening the yen in their campaigns in order to boost exports. Uh oh…

Of course the BOJ can still assert its independence and hold off any intervention moves unless they agree it’s really necessary. But if the Japanese government insists on capping the yen’s gains, it could resort to fiscal policy or come up with creative means to weaken their currency. That being said, make sure you stay on your toes and never underestimate the element of surprise!

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