Yen Slumps

There are several factors weighing on the yen:

1. Speculation spurred by a unsourced story in an English version of a Japanese paper suggesting that the BOJ is considering additional monetary measures to combat deflation and lower yen borrowing costs. The BOJ seems to be under some pressure from the MOF to do more on this front. The BOJ's response appears to be that the government needs to reduce its deficit financing.

2. This week, for the first time since last August, three-month LIBOR for yen is below three-month LIBOR for dollars. Although we have not emphasized this as it relies on the LIBOR fixings

3. In the new budget for the fiscal year beginning April 1 is an new JPY5 trillion increase in the financing bill cap. Financing bills are the way that the BOJ funds its intervention in the foreign exchange market. Where does it get the yen to sell when it buys dollars ? It sells financing bills to dealers. This would seem to increase the ability of Japanese officials to intervene. While this seems true, the cap on financing bill issuance was not a major obstacle to intervention in any event. As of the end of December 2009, the outstanding amount of financing bills was about JPY110 trillion and the cap was at JPY140 trillion. Some observers might, however, see the increase as making intervention somewhat more likely.

4. The recent yen weakness coincides with a firm tone in Europe and an easing of Greek tensions, even if just for the moment, after the successful bond sale yesterday.

The JPY90.60 resistance are has been tested. With short-term momentum indicators overdone, it is likely to more or less hold in the waning hours of this week's activity. However, if that level is breached early next week, there is scope for move to JPY91.60. Japanese institutional investors who typically repatriate funds ahead of the fiscal year end might see this recent price action as a gift--the dollar was threatening support near JPY88 less yesterday--and sell dollars into it.