When traders start putting “USD/JPY” and “post-war lows” in the same sentence, you just know that the Bank of Japan isn’t going to stand by and do nothing!
Last Friday we saw USD/JPY plummet to an intraday low of 75.83, a level not visited since Japan revalued its currency after the World War II. The dollar weakness wasn’t concentrated against the yen though, as a combination of risk appetite ahead of the EU meetings and talks of a QE3 inspired a broad-based dollar selloff.
Another possible explanation for the yen’s upsurge against the Greenback is the break of important technical levels for USD/JPY. The pair had been testing the 76.00 handle for weeks already, so the price action might have triggered sell stops at the spike of the dollar weakness.
Because of the pair’s notable price action, traders are now speculating the possibility of another currency intervention from the BOJ. After all, the central bank had actively weakened the yen a couple of times already this year.
Some of the more notable actions include the G7’s joint currency intervention after the March 11 earthquake in Japan and the intervention in August when USD/JPY broke below the 77.00 mark. Unfortunately for the BOJ, the second exploit didn’t work as the pair dropped to the 76.00 area just a few days after the intervention.
As expected, the Japanese government is unhappy with the yen’s recent stubbornness, so they devised a plan that could help the country deal with the effects of the rising yen. You see, a strong yen is damaging for Japan’s export-driven economy because it drives up the prices of their goods overseas. This hurts demand for Japanese products because buyers like to get the most bang for their buck, just like Happy Pip enjoys good bargains on high-heeled boots.
To protect their domestic industries, Japan’s cabinet members came up with a plan that could keep the yen from further appreciating and at the same time allow Japanese companies to benefit from the recent yen strength. Talk about hitting two birds with one stone!
One part of the program, dubbed the “Strong Yen Plan”, involves increasing the funding available for yet another yen-tervention from 31 trillion JPY to 46 trillion JPY. Another part of the program focuses on providing 10 trillion JPY in loans to Japanese firms that are acquiring businesses outside the country. Such overseas acquisitions would involve selling bajillions of yen (okay, maybe just millions), which would eventually push its value down.
In case yen strength still prevails despite these measures, the Japanese government is ready with Plan B. This back-up plan includes measures to support small and mid-size businesses that get battered from the yen’s strong rallies.
I’m pretty sure everyone’s wondering “Will the Strong Yen Plan work? And what will Huck wear for Halloween?” Well, I’m not sure what to expect for Huck’s Halloween costume, but Japan’s Economy Minister Motohisa Furukawa did mention that the Strong Yen Plan could boost their GDP by 0.5%. He also pointed out that the steps outlined in the plan may appear small but they will be powerful in effectiveness.
Should the Strong Yen Plan fail, the Japanese government emphasized that currency intervention is still an option. On top of that, they are expecting “appropriate and decisive” monetary policy measures from the BOJ and nothing less. Now that sounds dead serious if you ask me!