DJ Forex Focus
Bank of Japan Prepares For The Inevitable. By Nicholas Hastings
The Bank of Japan is wise to prepare for battle.
The increase in its intervention war-chest by Y5 trillion to Y145 trillion--the first increase in six years--may yet be needed to halt the yen's relentless rise.
For all practical purposes, the yen shouldn't be so strong.
Weak economic fundamentals in Japan, where deflation remains a threat to recovery, suggests that the dollar should be trading well above Y100 rather than heading back under Y88 as it is now.
See the dollar's recent slide against the yen:
Click Image to Enlarge
In fact, a dollar down at this level against the yen is the last thing Japan needs as it struggles to gain a competitive foothold against the somewhat more robust economies of China and South Korea.
The problem is that in this topsy-turvy world where confidence in the global recovery remains very fragile and where the threat of a sovereign default in Europe remains a real threat, investors are still looking at the yen as a better bet.
And there is little indication that this sentiment will change just now.
Initial optimism that growth in the major economies would be enough to bring early increases in interest rates, a trend that the Bank of Japan would hardly be able to follow just yet, have faded fast as economic data have failed to live up to expectations.
A harsh winter in the northern hemisphere has only made matters worse. Instead of U.S. bond yields continuing to rise with hopes of an early rise in U.S. rates, they have come under pressure in recent days, making the dollar even less attractive against the yen.
Greece's debt problems certainly aren't helping matters either. Although the country has produced the austerity package financial markets were looking for, there is no reassurance that the package will be implemented in full or that the measures are enough to convince Germany and France to come to the country's aid.
With the risk of a credit downgrade remaining and the threat of contagion to other debtors not going away, investors are expected to continue shying away from risky assets for now.
Japanese investors, meanwhile, are only making things more difficult with their annual end-year repatriation of funds. New weekly portfolio data showed another net inflow of Y717.2 billion, providing extra fuel for the yen's advance.
So the Bank of Japan's preparations not only signal to the market that intervention remains an option, but also that the central bank is fully prepared to intervene if it has to--for the first time since 2005--given that market conditions are hardly likely to change.
Early Friday in Europe, the yen was a little lower after reports in Japanese newspapers that the Bank of Japan could take additional steps to ease monetary policy by expanding the volume of loans at a fixed rate.
However, any such move is seen as having a limited impact and the yen soon stabilized again as market attention started to focus on the release of U.S. non-farm payrolls later in the day.
By 0745 GMT, the dollar was up at Y89.41 from Y89.09 late on Thursday in New York, according to EBS. The euro was also up at Y121.44 from Y120.98 even though the single currency got hit by a warning from Jean-Claude Juncker, head of the Eurogroup forum of finance ministers, that the German taxpayer isn't about to come to Greece's rescue.
The euro, meanwhile, was trading marginally higher at $1.3581 from $1.3576 as the market waits to see how German Chancellor Angela Merkel responds to Greece's recent austerity package when she meets with Greek Prime Minister George Papandreou in Berlin later in the day.
The increase in its intervention war-chest by Y5 trillion to Y145 trillion--the first increase in six years--may yet be needed to halt the yen's relentless rise.
For all practical purposes, the yen shouldn't be so strong.
Weak economic fundamentals in Japan, where deflation remains a threat to recovery, suggests that the dollar should be trading well above Y100 rather than heading back under Y88 as it is now.
See the dollar's recent slide against the yen:
Click Image to Enlarge
In fact, a dollar down at this level against the yen is the last thing Japan needs as it struggles to gain a competitive foothold against the somewhat more robust economies of China and South Korea.
The problem is that in this topsy-turvy world where confidence in the global recovery remains very fragile and where the threat of a sovereign default in Europe remains a real threat, investors are still looking at the yen as a better bet.
And there is little indication that this sentiment will change just now.
Initial optimism that growth in the major economies would be enough to bring early increases in interest rates, a trend that the Bank of Japan would hardly be able to follow just yet, have faded fast as economic data have failed to live up to expectations.
A harsh winter in the northern hemisphere has only made matters worse. Instead of U.S. bond yields continuing to rise with hopes of an early rise in U.S. rates, they have come under pressure in recent days, making the dollar even less attractive against the yen.
Greece's debt problems certainly aren't helping matters either. Although the country has produced the austerity package financial markets were looking for, there is no reassurance that the package will be implemented in full or that the measures are enough to convince Germany and France to come to the country's aid.
With the risk of a credit downgrade remaining and the threat of contagion to other debtors not going away, investors are expected to continue shying away from risky assets for now.
Japanese investors, meanwhile, are only making things more difficult with their annual end-year repatriation of funds. New weekly portfolio data showed another net inflow of Y717.2 billion, providing extra fuel for the yen's advance.
So the Bank of Japan's preparations not only signal to the market that intervention remains an option, but also that the central bank is fully prepared to intervene if it has to--for the first time since 2005--given that market conditions are hardly likely to change.
Early Friday in Europe, the yen was a little lower after reports in Japanese newspapers that the Bank of Japan could take additional steps to ease monetary policy by expanding the volume of loans at a fixed rate.
However, any such move is seen as having a limited impact and the yen soon stabilized again as market attention started to focus on the release of U.S. non-farm payrolls later in the day.
By 0745 GMT, the dollar was up at Y89.41 from Y89.09 late on Thursday in New York, according to EBS. The euro was also up at Y121.44 from Y120.98 even though the single currency got hit by a warning from Jean-Claude Juncker, head of the Eurogroup forum of finance ministers, that the German taxpayer isn't about to come to Greece's rescue.
The euro, meanwhile, was trading marginally higher at $1.3581 from $1.3576 as the market waits to see how German Chancellor Angela Merkel responds to Greece's recent austerity package when she meets with Greek Prime Minister George Papandreou in Berlin later in the day.
5 March | 
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