Wednesday, June 09, 2004

Japan backs off

Japan hasn't weakened the yen in April or May. Why?

They haven't needed to. Why?

The market has weakened the yen all by itself. Why?

The answer depends on who you ask.

An investor might say expectations of rising US interest rates make Japanese assets less attractive.

An analysts might say the yen was overbought, and did not reflect economic fundamentals. After all, Japan's economic growth was always expected to slow over the course of the year.

Of course it's a combination of factors that influence the currency market in the short-term, since currencies move up and down (and up again) all in one minute!

The Japanese government says as little as possible, knowing their every word is being watched by everyone in the market, eagerly waiting to know where to next place their bets.

Still, it's comments by government officials that are responsible for the large part of short-term currency market moves. The market makes money on what the government says. That's how it works.


Japan's decision to back away from the currency market means fewer purchases of US assets with the money used to intervene in the market. So far this has not created too much cause for concern.

But markets are always looking for ways to make money. It's a sure bet the Japanese government won't allow the yen to strengthen too far against the dollar. Many traders prepare to benefit from short-selling the yen as Japan prepares to get back in the market.

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