Yen Rally – No End in Sight Yet?

Yesterday traders flocked to the yen like June brides swarm over a wedding dress sale after word got around that Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa failed to produce concrete action against the yen’s rapid appreciation. EURJPY fell to a nine-year low, while USD/JPY dropped to levels not seen since Bruce Wayne put on his velcro abs in Batman Forever 15 years ago.
For the past few months, risk aversion brought on by global financial crisis has been sending traders to low-yielding currencies like the yen. This is a big headache for the Japanese officials because the rapid appreciation of their currency weakens the competitiveness of Japan’s exports, which isn’t good for the export-based economy.

To give the BOJ credit, it has tried to hold off the yen’s gains by threatening to intervene. It’s just too bad that its verbal threats have been falling on deaf ears, as yen-buying pressure continues to be strong. The BOJ’s failure to provide concrete solutions has only fueled the appetite for the yen. If a weak yen was so important to the Japanese economy, then why hasn’t the BOJ intervened in the currency market?

After all, it’s not like they haven’t in the past. In fact, the central bank had already intervened in the markets way back in 2004 when USD/JPY fell below 109.00. But now that the yen is hitting 15-year highs against the dollar, what’s stopping it from intervening now? If it’s going to talk to the talk, then it better walk the walk right?

Well, the problem is that intervention is just a short-term solution. There is just too much moolah in markets that no central bank has enough to corner it. Just look at the Swiss National Bank! In the past, the SNB was notorious for its currency interventions. Do you know where the Swiss franc is now? It’s trading at all-time highs versus the euro! This shows that even with concrete intervention, not even a central bank can prevent the market from imposing its will.

If the BOJ really wanted to intervene, then it would need some sort of coordinated effort from other central banks. This coordinated effort could be similar to what the BOJ, the Federal Reserve, and the German Bundesbank’s did way back in 1995, when they carried on a concerted action to take USD/JPY off from its all-time low of 79.75.

Given the facts presented to us now, I feel that an intervention from Japan is unlikely. The US and Europe are still in poor economic shape, which means that they cannot simply afford to dump ginormous amounts of money to weaken the yen. I’m not sure how things will exactly play out, but for now, I’ll just put my money where it is SEEMINGLY safe – the Japanese yen.