Forex Trading Strategies Blog

It has been widely expected that the Bank of Japan (BoJ) is set to end its loose monetary policy regime and begin hiking interest rates gradually. However, a new statement by the Japanese Prime Minister Koizumi has reversed the market’s expectation. The PM’s statement suggests that he feels that it may be too early for Japan to start raising interest rates.

This along with corporate news that General Motors might sell its entire 20 % stake in Suzuki led the Yen to weaken against major currencies like the US dollar and the Euro. This sale would have meant that a huge amount of US dollars would be exchanged for the Yen so that GM could withdraw its investment. Thus, this transaction will exert a downward pressure on the Yen.

Japan has been running a zero percent interest regime for sometime now and the country’s central bank had hinted last month that it is planning to reverse this trend. The Yen had appreciated on this news. But, with the Japanese PM portraying a different point of view, the Yen is likely to display a confused trend until the BoJ announces its next interest rates on Thursday, March 9.

To read more on this, click here.

The Japanese central bank, Bank of Japan, in a statement early February, said that it plans to pursue its zero percent interest rate policy, which would imply a weaker Yen, especially after the US having raised its interest rates. However, in a recent statement, the Bank stated that it may be open to ending the easy monetary regime and may raise interest rates.

Japan seems to be in a catch 22 situation. Its economy is not in the best of shapes. So if it raises interest rates, any chance of rapid revival would be doomed. If it doesn’t raise interest rates, its currency will slip.

In economics it has been said that the currency of a country is like a stock. It reflects the health of the economy. Thus, if Japan’s economy is not in the best of shapes, a softer Yen is only revealing the truth. And, a softer Yen may actually help Japan with its exports as they would get cheaper.

More on the Yen, from the International Herald Tribune.

Strong economic data in Japan led the Yen to gain over a percent against the US dollar, in the expectation that the central bank may change its stance on its soft monetary policy in the coming months.

The corporate goods price index firmed up by 2.7% in January, its fastest increase in 16 years. Core sector machinery orders rose a sharp 6.8% against the expectation of a 1.5% increase.

The market was abuzz with activity with hedge funds taking a short position on the dollar and going long on the Yen.

Japan’s economy is still the second largest in the world behind the US and ahead of China and India. However, it has been experiencing flat growth for a long time and is likely to loose its position in the next few years, first to China and then to India.

Recent information released from Japan has shown that the country has spent large amounts of money to decrease the appreciation of the Yen.

Even though Japan has vehemently denied it, many of the forex trading analysts have pointed the finger at Japan for the country allegedly trying to hold down the value of its money.  But yesterday the Japanese finance minister announced that his government has not intervened for the past 21 months.

The information that was released showed that between 2003-2004, Japan spent over 35 Trillion Yen ($350 Billion US) in order to hold down the Yen’s appreciation versus the dollar.

This amount was purchased on the open market. However, since Japan’s influence in 2004, it seems as if there truly has been no intervention by the government against the Yen, and the Yen’s current market value is actually reflecting the state of the economy. For more information visit the article on forbes.com.