By Greg Holden – It didn’t take long for forex traders to notice the sharp rise in JPY crosses this morning. But many have expressed a type of unfamiliarity with the politics of Japan to truly grasp what was happening. Let’s try to understand what’s going on there.
First off, Japan likes having a weak yen. In fact, it loves having a weak yen. If the Bank of Japan (BOJ) could keep the yen exceedingly weaker than it currently is, it would. But there is the opposing pull of free markets, and the tenets of an international, free-floating, foreign currency exchange system which demands as much laissez faire as possible, and chastises those who act differently (e.g. China).
But Japan is an export-dependent country that needs its currency weak to help its goods gain better access to markets. So the rise of the yen since 2007 (as much as 50% gain on the USD since then) has the BOJ fuming. But what can they do if they want to remain fair partners in the global economic community?
Despite the political sensitivity surrounding a bank’s attempts at currency intervention, Japan’s central bank decided that it was time to step in and weaken the yen for its own economic survival. It’s not the first time, either. The BOJ stepped in back in 1999 and 2004, but much earlier in comparison. It shouldn’t have come as a surprise, though. Japan has been edging itself towards intervention for some time now. And speculators have been anticipating this move for weeks.
So now that it has happened, try to grasp what this means. Basically, the BOJ is selling its own currency, en masse. It’s flooding the market with its own currency by releasing its reserves of that currency. The result is what we’ve seen this morning: mass depreciation of the JPY. We shouldn’t expect major changes anytime soon, either. Anticipate a continuation of the JPY’s fall going into the next few weeks.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.
