One of the most intriguing storylines of the third quarter was Japan’s ongoing battle with its own stubbornly strong currency. Despite the current administration’s efforts to hold down the yen, its appeal as a safe haven caused a steady and material increase relative to most major rivals. With the Japanese economy still struggling to get back on track, the yen’s run higher has frustrated export-intensive business that have seen their goods become more expensive to international consumers.
In order to combat the rising yen, the Bank of Japan has begun to aggressively intervene in the foreign exchange markets in an attempt to cap the rise against the greenback. The Bank sold close to to $25 billion in September and appears ready to attack the exchange rate again if yen strength persists. “We will watch how the yen’s strength is affecting the economy, and if it becomes a downside risk we will take action in a timely and appropriate manner,” said Bank of Japan Governor Masaaki Shirakawa in Osaka late last month. However, these measures don’t appear to be working; the yen has resumed its rise against the dollar and the Japanese economy is still stuck in a low growth environment, leaving many to wonder what steps the Bank will take next to try to boost the economy.
Thanks to the Bank of Japan meeting on Tuesday, investors will likely get some level of clarity as to what the country’s policy is on its currency going forward. While it is a virtual guarantee that the BOJ will keep rates steady at 0.1%, many believe that the Bank will aggressively step up its bond buying program in order to decrease the borrowing costs for businesses in an attempt to jump start growth. Some expect that the bank will increase its purchases of five and ten year government bonds in order to help decrease the cost of borrowing for corporations, the majority of which borrow money at similar maturity levels. Some such as Mitsubishi UFJ’s Hideo Shimomura are calling for an increase in the bond buying program from its current level of 21.6 trillion yen up to at least 35 trillion yen ($420 billion), a level which will likely help to boost at least some level of economic activity if enacted.
The bank may also widen a 30 trillion yen ($358 billion) program providing loans to banks, according to 14 of 17 economists surveyed by Bloomberg News. While this program has been met with limited success so far, a possible boost in funding many help to spark smaller businesses in the country back to higher growth levels, which would in turn increase domestic consumption. Clearly, the Bank has a wide variety of very different programs available to use, so it will be interesting to see which direction the BOJ believes is the best for the struggling island nation.
ETF In Focus
Thanks to the possible announcement of these programs, as well as important comments from the Bank regarding their perceptions over future deflationary concerns and the currency outlook, look for the yen to remain in focus throughout much of Tuesday trading. While there are a variety of ETFs that target the Japanese yen, by far the most popular is the Rydex CurrencyShares Japanese Yen Trust (FXY), which has garnered more than $300 million in assets on robust average daily volume of close to 350,000 shares. Curiously, the fund experienced extremely light volume on Monday of just 83,000 shares, suggesting that many were waiting until today to see what the central bank meeting will bring.
FXY has surged by close to 11.3% so far in 2010, and has posted gains of 3% over the past two weeks. The fund charges an expense ratio of 40 basis points and looks to be among the most heavily impacted by the early morning meeting by Japan’s central bank.
Disclosure: No positions at time of writing.
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