Market Overview

Japanese Yen Falls Against US Dollar & Euro


The Japanese yen reversed course and strengthened against the American dollar, the euro and other major currencies during trading on Monday.

One of the reasons for the strengthening yen was that the Group of 20 nations resisted the requests from European Union leaders to increase the contribution from the International Monetary Fund (IMF) being used to help bolster the defense against a possible euro zone financial meltdown. With the future of the euro looking a bit bleaker, traders began moving funds back into the yen, which along with the Swiss franc is considered a safe haven currency.

Although most analysts believe that the yen will weaken further against the dollar over the next year, the yen has fallen so quickly against the dollar over the past two weeks that some traders may have been engaged in profit taking today.

Before today's trading session, the yen had weakened over the past two weeks since the Bank of Japan announced that it was stepping up its efforts to cool the rising yen.

Two weeks ago the Bank of Japan said that it was setting an official inflation goal of 1 percent in order to fight the deflation that has plagued the Japanese economy for most of the last two decades. The Bank of Japan also announced that it was pumping 10 trillion yen ($124 billion) into the Japanese economy.

Those moves followed an earlier confirmation by officials at Japan's Finance Ministry that they had conducted stealth currency interventions last year in order to weaken the yen and that might do so again in the future if speculators continued to push the yen higher.

The efforts of the Bank of Japan and the Finance Ministry finally halted the yen from moving higher against other major currencies and began to ease the pressure that Japanese exporters were feeling.

Japanese companies like Sony (NYSE: SNE) and Toyota Motor Corporation (NYSE: TM) had long complained that the yen was overvalued and was making it difficult for them to earn a profit on their exported goods.

News that the Japanese economy shrank a worse than expected annualized 2.3% during the fourth quarter of 2011 may have also played a part in the Bank of Japan's decision to take decisive action to halt the rising yen and make Japan's export driven economy more competitive.

Although many Japanese might be worrying today about where the yen will go from here, it seems more than likely that Japanese officials will stick to their plan to weaken the yen in order to give the Japanese economy a much needed economic boost by making Japanese exporters more price competitive.


Traders who believe that the yen will soon reverse course and begin to weaken again might want to consider the following trades:
  • Buy individual Japanese stocks like Sony (SNE), Toyota Motor Corporation (TM) and Panasonic (NYSE: PC) or the iShares MSCI Japan Index Fund (NYSE: EWJ). If the yen weakens further against the dollar and the euro, Japanese stocks could climb higher.
Traders who believe that the side effects of the euro zone's sovereign debt crisis will be too strong for Japanese officials to counter may consider alternative positions:
  • The CurrencyShares Japanese Yen (NYSE: FXY), the ProShares UltraShort MSCI Japan (NYSE: EWV) and the ProShares UltraShort Euro (NYSE: EUO) could all move higher if the yen begins to strengthen again because of an escalation of the euro zone's financial crisis.
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