Knight Stemplarwa

On the heels of the Bank of Japan’s emergency meeting at the beginning of the week in which policy-makers decided to extend quantitative easing to its credit markets, Japanese officials led by Prime Minister Hatoyama are suggesting various degrees of intervention to keep the yen from strengthening.  Or are they?

Taking their cues straight from the Bernanke book of monetary double-talk, Japanese ministers are offering conflicting views about what course of action needs to be taken to slow down the yen, including trying to enlist international help.  What they can all agree on is that a strong yen is bad for their exports and hence bad for their economy.

Regardless of the rhetoric and what may or may not happen, yen bulls are heading for the exits.  This also coincides with the resumption of the risk-taking trade, as the market has for the time-being dodged any contagion from last week’s news out of Dubai. 

All this in the name of “reducing volatility”. 

Let’s take a quick look at a chart of USD/JPY:



Should it breach 89, then the next stop could be the 90.75 level.

If the yen moves back down to the 85 level, then expect more forceful words from the ministers, and don’t necessarily rule out intervention.  What sounded like a good idea back in September could have major implications for the Japanese economy, especially if things don’t improve.

Also to keep an eye on for this pair is what is going on here in the US.  The forex market practically blew-off Plosser’s comments that we may need to raise rates here sooner than later to ward off inflation, regardless of recovery status.  While there is still much debate about where we are in the inflation/deflation realm, one thing can be certain: maintaining a zero-interest rate policy for a prolonged period of time will not be good for the US economy. 

If rates in the US, or even talks thereof, rise, then look for the yen to resume its “natural position” as the currency of choice for the carry trade.

In the meantime, Japanese officials will do all they can to threaten intervention to buy time and slow yen strengthening. 

Right back at ya, Bernanke!

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