Monday, January 30, 2012

Is Japan ready for another currency intervention?

The Eurozone crisis is putting upward pressure on the yen, with traders continuing to view it as a safe haven currency. Strong yen is making it increasingly difficult for Japan to compete in the global markets against nations like Germany who has a weak currency advantage. Even for something like autos manufactured in the US, there is still a component of parts that is brought from Japan.

USD/JPY (Bloomberg)

Japan had a trade deficit in 2011, which is unheard of for that country in recent years. Some of that was clearly driven by the tsunami disaster. There is no question however that a strong yen was a contributor.

Japam trade balance (Bloomberg)
In spite of the tremendously accommodating policy in 2011 including QE and zero rates, industrial production has been declining while equity and property markets are relatively weak. The environment looks deflationary, yet there are no more tools left in the BOJ's monetary toolbox. Except for one, albeit a temporary measure. Japan can intervene in the currency markets again in order to weaken the yen and give its exporters some relief.  This may in fact be BOJ's next move.

Japan would likely want the US and the Eurozone to help them put in place a coordinated move. But neither of their two biggest trading partners has much of an incentive to do so. Nevertheless BOJ may go it alone and find a quiet day to try to punish everyone who has on a speculative long JPY position.
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