Bank of Japan Running Out of Levers as Yen Climbs

Last week Japanese officials intervened in the markets in an attempt to dampen enthusiasm for the yen – this week the Finance Minister appears to be trying to talk investors into giving the currency a pass.

“The movement (exchange rate gains) doesn’t reflect fundamentals and has been one-sided,” Finance Minister Yoshihiko declared in a recent press conference. “It would be troublesome if it persists and I will continue to closely watch markets.”

A rising yen is “troublesome” for Japan as with each tick upwards against the U.S. dollar, the more it cuts into Japan’s export sales with the world’s largest consumer market. With the U.S. economy clearly on the decline right now, an increase in consumer goods exported from Japan will further erode demand for Japan’s products.

Unfortunately for Japan, the yen continues to be viewed as a safe haven destination along with the Swiss franc and gold. This remains true even though Japan’s public debt is well over 220 percent of the country’s GDP. However, Japan’s bonds are seen as very safe investments and at a time when safe havens are growing scarcer, interest in the yen is bound to increase.

Early last week the yen climbed to 76.29 yen to the dollar. This represents an increase of roughly 12 percent in the yen’s value since breaking the 85 yen to the dollar mark in early April.

The government stepped in at this point selling 4.5 trillion yen ($58 billion) into the market in an attempt to increase the supply and devalue the currency. The Bank of Japan also acted by increasing its fund used to buy bank assets to increase cash supplies by another 15 trillion yen ($194 billion). The combined efforts managed to drive the yen down to 78.86 on Thursday.

The impact of these actions did not last, however. By 4:00 pm in New York today, the yen was trading at 76.85 yen to the dollar and was continuing to gain. It seems that the impact of the U.S. market sell-off, together with the growing likelihood of Italy defaulting is a stronger force than Japan’s market interventions.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.