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Today’s big news in FX was the rally in the Japanese yen. The currency strengthened overnight and was the catalyst for a sharp sell-off in the Nikkei which ended over 2.4% lower this morning. The USDJPY fell back to hit its lowest level since October 2014 and came within 0.30 yen of the psychologically and technically important 110.00 level.

The strength of the yen is a disaster for Japanese policymakers. The Bank of Japan (BOJ) has already taken unprecedented measures to drive the currency lower in an effort to boost exports, drive economic growth and spark inflation in an effort to erase the country’s hideous debt. The BOJ’s Quantitative and Qualitative Easing programme is, given the size of Japan’s economy, far bigger proportionately than the monetary stimulus launched by any other central bank and comes on top of Prime Minister Shinzo Abe’s fiscal measures.

At the end of January this year the BOJ upped the ante through the adoption of negative interest rates. The yen fell sharply initially on the surprise announcement and the USDJPY briefly traded above 121.00. But then disaster struck as the yen subsequently strengthened. The USDJPY is currently down around 9% since the beginning of February.

There was some disappointment that the BOJ held off from easing monetary policy further last month, although many investors thought that would have smacked of desperation. Nevertheless, Reuters reported yesterday that the BOJ was preparing to ease again at its meeting later this month rather than waiting until July as many expected. This helped to push the yen lower for a bit, although it wasn’t long before the currency began to strengthen again. The trouble is that the BOJ has lost most of its credibility as some analysts have expressed concerns that the bank has reached the limits of effective looser monetary policy.

There is a two-day BOJ meeting over 27th and 28th April. Today’s story from Reuters suggested that any easing would likely be in the form of an increase in asset buying rather than additional rate cuts. However some analysts wonder just which assets the BOJ has left to buy? But there is a more immediate issue: what happens if the USDJPY breaks back below 110.00? If it does, then technically it looks as if it could have a lot further to fall. For this reason we shouldn’t be surprised if the BOJ “checks rates” overnight or actively intervenes to drive the yen lower.





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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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