An Analysis of the Japanese Government Intervention in the Yen

ForexNewsNow | Published on September 15, 2010 at 1:23 pm

global forex japanese yenNEW YORK (Forex News Now) – In a major move that has not been attempted in six years, the Japanese government today opted to intervene in the global forex trading markets and attempt to devalue the yen against the dollar.

The Bank of Japan announced the initiative to spend almost $20 billion to reportedly purchase dollars at 83 yen in an effort to drop the value of the yen against the dollar, effectively creating a competitive currency devaluation.

The move comes just one day after the ruling party in Japan’s government elected to keep Prime Minister Naoto Kan in an internal challenge to his control.  Kan, largely viewed as being in favor of a more valuable yen, is nonetheless moving forward with the intervention.

Why was this move initiated? And what does it mean for realtime forex traders?

The Reason Behind The Move
In attempting to devalue the yen, the Japanese government is trying to fend off deflation and protect its status as a net exporter.  A cheap yen makes Japanese products more affordable, which boosts Japan’s surplus and strengthens its economy.

A combination of dirt-cheap interest rates in the United States and a high risk aversion in the trading community has propelled the yen to near record-highs, and well below the levels from 2009 and earlier this year.

The Japanese economy has also slowed and has struggled to continue its expansion, as the rising yen began to cut into export receipts.  The second quarter saw a 1.5% increase in the Japanese economy, which is over 50% less than the first quarter’s growth.  A steep decrease in consumer confidence also contributed to the view within the Ministry of Finance that a bold move was needed to shore up a faltering economy.

What The Intervention Means For Global Forex Trading
The general consensus in the community is that the intervention will lower the value of the yen against the dollar in the short term, but will ultimately only be temporary in its effects.

Morgan Stanley went on record today suggesting that since the move was not coordinated with other countries, it will not be nearly as effective in the long term as Japan hopes.  Other economists agree, citing the presence of outside forces acting on the yen by buying and selling the currency.  It is likely that due to an uncoordinated devaluation, the momentary decrease in yen will make it more attractive to realtime forex traders against the dollar – counterproductively (from a Japanese perspective) causing it to rise in value.

In 2003 and 2004, the Japanese government spent over $420 billion to devalue the yen.  The result? The yen soared in value by over 10 percent.  Because of this, shorting the yen is not a wise long-term strategy, since historically the yen is set to improve.

Prior to the announcement, the dollar was trading at a 15-year low of 82.87 against the yen. The dollar has since improved, moving up to 85.63, a 3.13% increase on the day.  Traders who get in on the dollar quickly could benefit from the short-term increase in the dollar’s value, with a possibility of a short-trade opportunity before the end of the year.

Intraday analysis also suggests that the Swiss franc will benefit ultimately from the devaluation of the yen.  CHF is viewed as a safe haven currency much like the yen; a decrease in the yen could send investors instead to the franc, which moved up 2.36% against the yen yet dropped 0.73% against the dollar. This creates a potential buying opportunity as the USD/JPY trend is expected to reverse itself in the short-term, sending the dollar back down and – presumably- the franc up.

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