The Japanese yen made steady gains against the dollar and the euro, enjoying the safe haven status. This is changing and could continue to change.
The return of Japan to the dreaded deflation justifies an intervention, at least a stealth one. However, Japanese authorities showed their weakness in the past, and it’s hard to blame them: fighting the safe haven flow is very hard.
There are various factors moving the yen. The picture is mixed:
- Deflation: The fall in prices is sometimes called the “Japanese disease”. When an economy stagnates too long, it is “turning Japanese”. A constant fall in prices paralyzes the economy. Japan fought very hard to move prices to the upside, but now they are falling again. In order to reach the +1% inflation target, the BOJ might act. Raising the QE program up to 70 trillion yen is discussed in public.
- Bypassing the dollar: Japan and China began trading directly with their own currencies, bypassing the dollar that was used for their bilateral transactions so far. Apart from the implications for China, this move could strengthen the yen.
- Fighting EUR/JPY: Recent comments show that Japan is not only worried about the strength of the yen against the dollar, but also against the euro. The euro-zone is a significant trade partner.
- US Indicators: It’s important to note that apart from safe haven flows, USD/JPY reacts in the most “normal” manner to US indicators – rising on good ones and falling on the disappointing ones. The absence of QE3 in the US plays against the yen.
- Internal issues: Apart from deflation, Japan’s economy isn’t doing too well. A hotly debated sales tax is weighing on the country, as well as energy issues following the catastrophic earthquake, tsunami and nuclear tragedy. In addition, it has a debt mountain that is double its GDP. Nevertheless, these issues don’t impact its safe haven status or its currency.
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