Yen Falls as Bank of Japan Announces Inflation Goal, New Stimulus

By Daniel James Hayden IV

The Japanese yen fell against the US dollar after the Bank of Japan announced an inflation goal of 1% and said that it was increasing its asset purchase and lending program.

Although the Bank of Japan had already stated its intention to fight the deflation that has afflicted Japan’s economy for nearly two decades, the announcement of an explicit 1% goal sent a signal to the markets that Japanese officials are going to increase their deflation fighting efforts.

The announcement from the Bank of Japan came a day after it was revealed that the Japanese economy shrank a worse than expected annualized rate of 2.3% during the 4th quarter of 2011.

The shrinking Japanese economy was mostly blamed on the strong Japanese yen and the effects of last year’s floods in Thailand, which disrupted the manufacturing facilities of the many Japanese exporters that have operations in Thailand.

Although the effects of Thailand’s flooding on the Japanese economy are diminishing, the strong yen continued to make it difficult for Japanese exporters like Sony and Panasonic to be competitive in overseas markets.

Japanese officials have been hinting that they were going to take a more active role in bringing down the value of their currency. Last week, Japan’s Finance Ministry revealed that it had conducted stealth interventions into the Forex market last year and that if necessary they might do so again in the near future.

The Bank of Japan also announced today that it was adding 10 trillion yen, or $130 billion, to its asset asset purchase program and lending program, a move aimed at stimulating economic activity.

The move by the Bank of Japan seems to be working and Japanese exporters are finally getting the break they’ve been waiting for as they watch the yen drop to levels that it hadn’t seen since last year.

The Bank of Japan has been under pressure for quite some time to be more proactive in its efforts to fight deflation and promote growth.

Today’s announcements from the bank and the market’s reaction to them show that Japan may finally have had enough of deflation and unacceptably low economic growth.

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