High Japanese debt and aging demographics are the main problems facing today's Japan. These two issues will eventually erode the value of yen long term. However, as I have pointed out in the past (please consider - Why Printing Euros Will Make The EURUSD Rise):
The main factor that determines the value of any currency is cross border trade flows. For example, if you have a competitive economy and you export more goods and services than what you import, then at the margin, there will be a greater demand for you currency in the FX market. As long as a country has positive trade flows, its currency will appreciate.
So at the margin, in order for the yen to go lower, holders of yen have to sell and buy something else.
The BoJ for many years has been able to have its cake and eat it too. It was able to print vast amounts of money and keep the value of the yen elevated in order to protect the value of Japanese yen deposits.
However, the BoJ sooner or later has to decide if it wants to keep the value of the yen high or allow it to fall to help the struggling Japanese economy. As such, speculation on the return of the yen carry trade is once again in focus. An LDP-led government is widely expected to pressure the BoJ to ease monetary policy more aggressively and weaken the yen.
But this is easier said than done, for every major world currency also has zero interest rates. Among others, the U.S. dollar, the Swiss franc, sterling as well as the euro. With so many zero interest rate currencies in the world, which should carry trade speculators choose?
Also, in order for the yen carry trade to resume, the market has to be persuaded that growth will be steady and the playing field is ripe for speculation. The possibility of the U.S. falling into recession with the fiscal cliff looming is a big obstacle.
But with the Fed announcing that it would start buying $45 billion in Treasuries each month, in addition to the current policy of buying $40 billion in mortgage-backed securities, the BoJ has no choice but to follow.
The BoJ has to do the same in order to keep the yen from appreciating against the dollar. In fact, it probably has to purchase even more assets than the Fed. If it does, more than likely the Japanese public will be persuaded that the yen will fall and they will probably buy foreign assets against the yen to guard against such a fall.
So in the context of massive monetary stimulus by the BoJ to guard against the possibility of an increasing yen, all roads lead to a lower yen against all major pairs. And if we look at the charts, all major pairs are gaining against the yen and are all above their respective 200 day moving averages.
Having said all this, I also expect dollar weakness against the euro until such a time that the markets are reminded of the euro debt mess once again and what to do about it.
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