Yen to stay still despite Japan’s FX intervention

EXPECTATIONS of further Japanese stimulus are high. Many believe that the Bank of Japan (BoJ) will decide to pump $55bn into the flagging economy next week. Those looking to the Bank’s meeting for a shake up in the dollar and euro against the yen are likely to be left wanting.

Firstly, traders should not be so sure that Japan will actually introduce further quantitative easing (QE). On Wednesday, the governor of the BoJ, Masaaki Shirakawa, said that while QE has helped stabilise financial systems in Japan in the past, it has only had a limited impact on boosting the economy. Analysts are speculating that this could mean that the BoJ will seek alternative solutions to QE.

But even if the BoJ goes ahead with QE, $55bn is not actually a lot of money in terms of an economy the size of Japan. Neil Mellor of The Bank of New York Mellon says “The Japanese stimulus would have to be far larger to make waves”, and that currency traders should be more interested in the impact of the US’s QE programme when looking for changes in dollar-yen and euro-yen.

Existing US QE has already had an impact by diluting the strength of the dollar. Mellor says much of the recent trends in currencies have been the result of this: “People need to do something with their dollars, so they have put them in euros. The euro is a sort of default currency.”

Since May the euro has moved sideways against the yen (see chart below). Considering that Greece’s sovereign debt crisis and last week’s Irish bank downgrade fell during this period, the stability of the euro-yen has been impressive. For this reason Mellor predicts greater downside for dollar-yen than euro-yen in the next few quarters. He says: “The only thing stopping the euro going up in the near-term is nervousness over certain levels.”

In fact, Mellor believes that currency trends at the moment have little to do with the underlying economies: “Nobody really knows what’s driving the currencies at the moment so technical analysis has taken over.” That is, the psychological impact of certain numbers are governing where investors are putting their money. For example, he thinks that we will only start to see changes in euro-yen if Irish credit default swaps hit above 500 basis points.

Even if Japanese QE makes a substantial impact on the Japanese economy, currency experts such as Ian Stannard of BNP Paribas think that the result could be increased investment in Japan, which would keep the yen broadly in the same range against the dollar and the euro.

So for as long as American QE contributes to the devaluation of the dollar, the dynamic between the euro-yen and dollar-yen – regardless of the proposed Japanese QE – is likely to remain broadly the same.