USD/JPY Currency Update : Dollar Yen Rate Set to Improve as Investors Transfer Funds Out of JPY

March 3, 2011 - Written by John Cameron

STORY LINK USD/JPY Currency Update : Dollar Yen Rate Set to Improve as Investors Transfer Funds Out of JPY

Tokyo’s leading Nikkei 225 equities index gained almost a percentage point during yesterday’s session, causing selling pressure on the Yen as investors liquidated their positions of safety in Yen-denominated assets and moved funds into higher risk, higher reward instruments.

The Yen reached a multi-year high against the USD at the end of last October, trading down to 80.24. Since then, it has peaked three times against the Greenback, but significantly, each near term low for USD/JPY has been higher than the last. From a technical perspective, this indicates the emergence of a new uptrend for USD/JPY.

Turning to the fundamentals, Japan is one of the few developed economies currently suffering the effects of deflation. The most recent Japanese inflation figure, released in January, showed that consumer prices excluding fresh food had fallen for the twenty third month in a row. Such price deflation can be as harmful to an economy as inflation, with consumers opting to postpone large-ticket purchases, causing a slow-down in economic growth.

Japan’s government is keen to counter domestic deflation and has confirmed that interest rates will remain in their present range of 0.00-0.10% for the foreseeable future. Additionally, the ruling party in Japan is attempting to push through legislation which would see a tranche of YEN44.3trillion worth of Japanese Bonds released on the market in order to provide further liquidity for Japan’s frozen domestic credit market. If this legislation was passed, the Yen would be likely to come under heavy selling pressure.

Japan’s government is now committed to a record level of spending, equating to $1.1trillion, for this financial year in order to provide further economic stimulus. However, the expansion to Japan’s national debt, which is already the largest in the world, may serve to further erode the market’s confidence in the Yen.

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TAGS: Japanese Yen Forecasts Pound Yen Forecasts