Market Overview

Yen Falls as Bank of Japan Announces Inflation Goal and New Stimulus


The Japanese yen fell against the US dollar after the Bank of Japan announced an inflation goal of 1% and said that it was increasing its asset purchase and lending program.

Although the Bank of Japan had already stated its intention to fight the deflation that has afflicted Japan's economy for nearly two decades, the announcement of an explicit 1% goal sent a signal to the markets that Japanese officials are going to increase their deflation fighting efforts.

The announcement from the Bank of Japan came a day after it was revealed that the Japanese economy shrank a worse than expected annualized rate of 2.3% during the 4th quarter of 2011. The shrinking Japanese economy was mostly blamed on the strong Japanese yen and the effects of last years floods in Thailand, which disrupted the manufacturing facilities of the many Japanese exporters that have operations in Thailand.

Although the effects of Thailand's flooding on the Japanese economy are diminishing, the strong yen continued to make it difficult for Japanese exporters like Sony (NYSE: SNE) and Panasonic (NYSE: PC) to be competitive in overseas markets.

Japanese officials have been hinting that they were going to take a more active role in bringing down the value of their currency. Last week, Japan's Finance Ministry revealed that it had conducted stealth interventions into the FOREX market last year and that if necessary they might do so again in the near future.

The Bank of Japan also announced today that it was adding 10 trillion yen, or $130 billion, to its asset asset purchase program and lending program, a move aimed at stimulating economic activity. The move by the Bank of Japan seems to be working and Japanese exporters are finally getting the break they've been waiting for as they watch the yen drop to levels that it hadn't seen since last year.

The Bank of Japan has been under pressure for quite some time to be more proactive in its efforts to fight deflation and promote growth. Today's announcements from the bank and the market's reaction to them show that Japan may finally have had enough of deflation and unacceptably low economic growth.


Traders who believe that the Bank of Japan will be successful in its efforts to fight deflation and get the economy moving in the right direction might want to consider the following trade:
  • The iShares MSCI Japan Index Fund (NYSE: EWJ) ETF should climb higher if the Japanese economy begins to grow at a healthy rate. The recent actions of the Bank of Japan and the Finance Ministry show that Japanese officials are serious about addressing Japan's economic problems.
Traders who believe that the Bank of Japan will not be successful may consider alternative position:
  • The CurrencyShares Japanese Yen Trust (NYSE: FXY) ETF could move higher if the Bank of Japan is unsuccessful in its efforts. The current weakening of the Japanese yen could present a good buying opportunity if more bad news from Europe has traders ditching the euro in favor of the yen.
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