Last updated: April 4, 2013 6:15 pm

Yen plunges as easing exceeds forecasts

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A woman arranges Japanese currency at the World Currency Shop in Tokyo, Japan©Bloomberg

The yen dipped sharply against other leading currencies after the Bank of Japan surprised financial markets with its sweeping measures to combat deflation.

The dollar and the euro rose more than 3 per cent against the Japanese currency after Haruhiko Kuroda, the new BoJ governor, announced a “new phase of monetary easing” that was expected to have a weakening effect on the yen.

The move wiped out almost all of the gains made by the Japanese currency in the wake of the crisis in Cyprus over the past two weeks, which saw rising demand for the yen, traditionally a haven in times of global crisis.

Investors also pared short yen positions in run-up to the BoJ’s meeting amid caution over whether the central bank’s policies would go far enough.

“The BoJ policy announcement has exceeded market expectations by a wide degree,” said analysts at Morgan Stanley. “Effectively, the BoJ has declared an open-ended quantitative easing programme designed to change expectations within Japan’s economy.” 

Currency analysts were hastily adjusting their forecasts for the yen after the move by Japan’s central bank caught foreign currency markets by surprise.

“Clearly, today’s [Thursday’s] monetary policy action by the BoJ raises considerably the risk the yen is weaker than our current expectations,” said analysts at Bank of Tokyo-Mitsubishi in a note to clients. The bank said that the dollar could rise above Y100 later this year if the US economy strengthened.

Until mid-March when concerns began to weigh on the yen, the dollar had staged a remarkable rise against the Japanese currency as investors priced in expectations that the Bank of Japan would act to combat deflation. The US currency gained more than 20 per cent against the yen between November and March.

Foreign exchange analysts said a key test of how far the yen would weaken in the months ahead was whether the BoJ’s new policies would encourage domestic investors to invest more money overseas.

Traders and analysts at investment banks say that much of the weakening trend in the yen so far this year has been driven by overseas investors. By contrast, domestic investors have been taking advantage of the weaker yen to repatriate overseas assets.

“Today [Thursday] was so much more aggressive than anyone thought that this could be a real game-changer,” says Derek Halpenny, foreign currency strategist at Bank of Tokyo-Mitsubishi.

“The key is whether this will convince the sceptical Japanese investor community that the BoJ really means business.”

The US dollar hit a daily high of Y96.41 on Thursday, close to its strongest level since the summer of 2009, while the euro swung from Y119 when Asian markets opened to a high of Y123.93.

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