You'd think that the yen would drop across the board, similar to what happened to the Kiwi a couple of weeks back when the Christchurch earthquake hit. But instead, traders found themselves scrambling to buy the yen up on the news that the huge structural and economic damage would lead to a huge repatriation of funds from overseas.
It was not only the expectations that Japanese companies would send back money from overseas that caused the yen to rally. The uncertainty surrounding the situation also triggered a wide-reaching case of risk aversion in the market, which helped the yen extend its gains over other major currencies.
In order to help the economy, BOJ Governor Maasaki Shirakawa ordered to pump 12 trillion JPY into the economy to stabilize financial markets. Doing the math, that's around 146 billion USD! It's a pretty big move, but we have to give kudos to the BOJ for providing liquidity for to make it easier for survivors to access cash.
BOJ Governor Masaaki Shirakawa's remarks that he ain't scared of letting "massive" liquidity flow and with the yen trading at its highs against the dollar, rumors have been going around that the BOJ could also intervene in the currency market to help exporters.
In the meantime, I'm gonna be keeping an eye on the Japanese government and more specifically, what Prime Minister Kan plans to do. Remember, he has had problems in the past with regards to passing the budget amid political strife. Given the ongoing crisis however, I believe that government officials will have to put their differences aside and come up with a rock solid solution to get Japan back up on its feet.
Word is that the government is setting up a supplementary budget dedicated for earthquake relief and reconstruction. Some ideas include allocating the remaining discretionary funds for this fiscal year (about 200 billion Yen) and next year's 350 billion Yen allocation towards the relief efforts. Although this could push Japan's debt higher, Kan feels that providing moolah for quake relief is the more important task at hand. Another idea that was proposed was to implement a temporary tax in order help fund the budget.
Looking ahead, there's no doubt that are great risks to the Japanese economy over the next few months. GDP will most likely take a karate chop to the gut, while public debt will (once again) explode. Industries such as farming, refining, electronics and automobile assembly will most likely see a dip in demand.
On the flip side however, we could see a pick-up in consumption and GDP growth come the end of the year. What some people fail to realize is that while natural disasters are a major burden, they also lead to reconstruction and relief efforts, which helps boost spending by local corporations.
I wonder though, what effect this could have on the yen. As I pointed out earlier, the yen gained on Friday once the European and U.S. markets woke up to the unexpected news. Can the yen continue its ridiculous rally?
If you ask me, I ain't too sure if the yen can continue its bullish run. Yes, the yen did soar to all time highs following the earthquake in 1995. But given how strong the yen has been recently, and with the government pouring in boat loads of money into the economy, there might not be enough bullish momentum to carry the yen to new highs.
In addition, it wouldn't surprise me if the BOJ decides to intervene in the markets in an effort to weaken the yen and help boost its export industries. It could be easier for the BOJ to intervene now if the yen continues to rise because other countries may be more understanding of the bank's move. Heck! They just got hit by an 8.9 magnitude earthquake and a tsunami. I'm sure everyone will cut the Japanese some slack for wanting to boost their exports.
With that said, I wouldn't put my money on the yen just yet. Let's see how things play out over the next couple of weeks and what moves the Japanese government takes before we place our bets.