Bank of Japan to the Yen's Rescue

Today the Bank of Japan (BOJ) held an emergency session to examine the Yen’s recent strength and its overall effect on the Japanese economy. It was reported the Yen has reached a 14 year high versus the US dollar. Recently, the Yen has appreciated against many of the major world currencies, namely the US Dollar. Risk Aversion has been one of the primary reasons for this currency’s meteoric rise, as investors scamper around the globe looking for safety.

For the month of November, the Yen fell by approximately 4%. Year to date, the Yen is down 4.78%. This unexpected BOJ meeting is fueling speculation that the bank would exercise quantitative easing (increasing the money supply) to loosen the strangle hold the Japanese currency has had on its economy. Japan’s economy is export based, and usually leans towards a weak Yen policy, in order to promote global exports, and fight off a decade long battle with deflation. Companies such as Toyota (TOSBF.PK) and Sony (SNE) are adversely affected by a strong Yen, since a stronger Yen leads to higher price tag for consumers. Also, for many years Japanese business and individuals have looked to offshore havens to gain a higher rate of return on their investments, since key rates have been so low. Now that the Yen is much stronger, Japanese investors can use this to their advantage when looking to buy assets outside of this island nation, which would have an adverse effect on the future outlook of the currency

As reported in a Bloomberg article, the BOJ “has few options given that the overnight lending rate is at 0.1% and the bank is already purchasing government and corporate debt.” In December of 2008, the BOJ reduced its key rate from .3% to its current level. Having already exercised the monetary policy tool of choice (interest rate adjustment) for central banks, the only logical course of action would be to weaken the Yen by increasing Japan’s money supply via quantitative easing.

Disclosure: Long YCS