More on the Yen and Japan ...

I deal with aspects of the Japanese currency and economy in the post just below this one. However, just as I pressed 'post' yesterday the bulletins rolling in from Bloomberg reported on how the BOJ is to increase the watching on capital investment risk.

The Bank of Japan is monitoring the risk that business investment may overheat, derailing the longest economic expansion since World War II, minutes of its September policy board meeting show.

``A few members commented that they would continue to pay attention to whether there was a possibility of any acceleration of business fixed investment causing large economic swings,'' according to the minutes of the Sept. 7-8 policy meeting. The board voted unanimously to keep rates unchanged at the meeting, after raising them for the first time in almost six years in July.

Furthermore and to be fair Bloomberg also hit us with the inevitable effects of this namely a strengthened Yen which is contrary to my discourse in the post linked above. But still let us not get ahead of ourselves; we are talking day-to-day market reactions based on the 'minutes' of a BOJ. However, the signals from the BOJ do in fact point to a possibility of a raise, so as I said to be fair.

On another yet similar note Felix Salmon from RGE also has a piece on the Japanese currency today and more specifically the Yen/Dollar carry trade which is still attractive due to wide interest rates spreads. Felix muses that in fact the BOJ is not worried on the downward pressure on the Yen as a result of carry trading but whether (and to what extent) carry trading is in fact pushing up short-term rates and whether the BOJ, in this light, should tighten.

In other words, the sheer size of the carry trade might have created a Japanese monetary paradox: if the BoJ tightens, the carry trade gets unwound, and short-term interest rates might actually go down instead of up. That's why the BoJ is "monitoring" carry: it's nothing to do with the weakness of the yen.

Comments

[Paris ib]

Currencies move because there is buying and selling. When you run a trade surplus you have more buyers than sellers, unless you decide to keep the foreign currency you earn in foreign currency. For as long as the Japanese decide NOT to transfer their earnings into Yen, the Yen can remain weak, should they decide at any point to ship the money home, then the Yen will strengthen. It's not rocket science. But given that the Japanese run a massive trade surplus the underlying fundamentals for the Yen are POSITIVE. Capital flows are the tricky part. Up to now Central Banks in Asia have been happy holding USD (which means the Japanese did not cash in their earnings), but there are rumours that this about to change.

See: <a href="http://www.informationclearinghouse.info/article15346.htm">LINK</a>.

Such changes would be add to the already positive YEN fundamentals, and would make the outlook for the USD particularly grim.