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The Surging Yen Is Now Over

Japanese Yen

By David Frank, Chief Analyst, Ava FX

What is Next?

The Group of Seven nations met last Thursday to discuss the impact of Japan's deepening nuclear crisis.

Group of Seven will discussed how to calm financial markets spooked by the nuclear crisis.

Japanese Economic Minister, Kaoru Yosano, insisted the Yen and Japanese stock markets were not in a state of turmoil and that the government would like the G7 "to merely provide a psychological prop to markets."

The Yen surged to a record high against the Greenback last week, while shares in Japan and elsewhere in Asia fell after US officials said the risk of a catastrophic radiation leak from the already crippled Japanese nuclear plant was rising.

In a further blow, the Yen jumped higher on speculation Japanese insurers would repatriate funds to pay for massive claims following the deadly 9.0 quake and the devastating tsunami that destroyed the northeastern Japan.

The disaster and subsequent nuclear crisis have caused hundreds of billions of dollars to disappear off global stock markets.

Japan's Finance Minister Yoshihiko Noda, Yosano dismissed talk about repatriation of money and said speculation, not fund flows, was responsible for the currency's surge, which threatens to increase pressure on the already devastated economy. "I don't think stock and currency markets are in a state of turmoil," Yosano said. He said this in response to whether or not the G-7 should intervene. "We would like to get psychological support from the G7," he said.

G7 leaders held a teleconference last Thursday with Japan will explain the extent of the damage and the financial market situation.

While government officials were stepping up verbal intervention, the Bank of Japan has continued to pump massive amounts of money into money markets to ensure it would not seize up; with the latest offer of 5 trillion yen in same-day funds. The bank had already injected a record 20 trillion, through a combination of same day and longer tenor funds. Further injections seem imminent.

However, there is not that much that the BoJ or other economic leaders can do. The current surge is being driven by the nuclear crisis that seems to be abating as of now. While Japan's currency rose 3.74 percent against the dollar in the six days after the March 11 temblor, it is poised to drop in 2011 by the most in six years. A recent economist survey conducted by Bloomberg shows the Yen is set to depreciate substantially. Currently, we are seeing derivatives traders cutting wagers on further gains after Group of Seven nations followed Japan's lead and sold Yen as it reached a post-World War II high of 76.25 versus the dollar.

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