Yen’s Weakness Finally Found?

Even the strongest of the strong have weaknesses. For Superman, it’s kryptonite; for Thor, it’s losing his hammer; for Cyclopip, it’s deodorant. The yen has significantly weakened since the Bank of Japan’s (BOJ) last monetary policy statement. Could it be that the central bank has FINALLY found the yen’s weakness?

Back in February 14, 2012, the BOJ announced that it would spend another 10 trillion JPY in asset purchases to support the economy as it aims to hit its new inflation target of 1.0%. Since then, it seems like the yen hasn’t been its usual-strong self. USD/JPY has risen about 300 pips and is now trading above the 80.00 psychological handle.

USD/JPY Daily Chart

Not so long ago, we saw the central bank try and fail at weakening the yen via direct market interventions. The last time we saw the BOJ step in the forex market was in October 31, 2011, but as I said in my year-end review, the yen quickly pared its losses to the BOJ’s disappointment.

Now it looks like the BOJ has learned from its mistakes. It’s most recent approach to weaken the yen is different from its previous attempts. This time around, it also set an inflation target to manage expectations that a loose monetary policy will be in place for a while.

And stats show that the BOJ’s strategy seems to be working! Data from the International Monetary Market shows that net long-yen positions dropped from its peak in January at 9.7 billion USD to 2.7 billion USD last week.

Now, I know that much can be said about how the pace at which USD/JPY has risen demands some sort of slowdown in the near term. But what about the pair’s long-term outlook?

Looking at the big picture, I have reason to believe the USD/JPY may see more gains down the line. The BOJ’s easy monetary policy aside, I think that the start of Japan’s new fiscal year on April 1 will see more yen selling as yield-seeking Japanese investors hunt for better returns abroad. And that’s no April Fools’ joke!

In addition, I think the U.S.’s broader growth prospects and changes in the FOMC’s lineup could push U.S. rate expectations higher, and that in turn could exert upward pressure on USD/JPY in the long run.

Still, we can never discount the potential effects of risk sentiment on yen price action. Risk appetite has been up on recent developments on the European debt crisis, so things are fine and dandy now. This, no doubt, has had a hand in the yen’s recent sell-off. But what’ll happen when risk appetite turns down? I guess that’s when we’ll truly see the BOJ’s strategy put to the test.


  • Hedgehog

    Yes, BOJ should have thought of this from the beginning. Heck, with an economy with negative GDP and deflation, what other monetary policy other than printing more yen would do the trick? If I were the BOJ and I want to further weaken the yen, I’ll do more QE.