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Bank of Japan May Be Changing Stance on Yen

10/20/2009 12:01 am EST

Focus: FOREX

Boris Schlossberg

Managing Director of FX Strategy & Co-Founder of BKForex LLC, BK Asset Management

Bank of Japan minutes indicated that members are beginning to consider an exit strategy for the ultra-accommodative policy, including the end of the quantitative easing program, to help corporate funding. "The amount of Commercial Paper and corporate bonds purchased by the Bank has declined significantly, and interest rates in fund-supplying operations...have been stable at low levels," the minutes quoted a few members as saying.

If economic conditions continue to improve, the BOJ may decide to terminate the support for the corporate funding program at its next meeting in December. Some Japanese fiscal officials have expressed concerns that such moves by the BOJ may be premature, but the latest economic data supports the more hawkish posture by the monetary officials.

Yesterday’s tertiary activity report, which measures activity in the services sector, printed at 0.3% versus 0.1% eyed. This was the third consecutive positive monthly result, albeit the pace of improvement was slightly less than the 0.7% increase the period prior. Nevertheless, this report was only the latest data point to suggest that Japanese economic activity has picked up pace over the past several months despite the persistent strengthening of the yen, which continues to weigh on the export sector.

USD/JPY came off the 91.00 handle in late-Asian trading as the buck weakened across the board, but the pair continues to remain above the key 90.00 level. If US economic data provides further upside surprises this week, the pair may rally further on the assumption that US policymakers will also begin to entertain the possibility of exiting from some of the extraordinary quantitative easing measures undertaken this year.

If the market begins to anticipate any tightening in the US yield curve, the dollar is likely to perform the best against the yen given the small interest rate differentials in the pair and USD/JPY could rally to 95.00. Such a move in turn would likely expedite the BOJ’s own removal of QE measures as exchange rate pressures on the Japanese export sector would ease considerably.

By Boris Schlossberg of

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