Yen Weakness May Continue As BoJ Buys Government Bonds

Fundamental Outlook for Japanese Yen: Bearish

- Japan’s Tertiary Index unexpectedly rose 0.4%, on increased demand for information and communication services
- BoJ left interest rates unchanged at 0.1%, but announced an increase of government bond purchases by 29%


The Japanese yen lost ground against most of the major currencies as the Bank of Japan announced that it would increase its buying of government debt to 21.6 trillion yen. The statement announcing the board's decision said economic conditions in Japan have "deteriorated significantly and are likely to continue deteriorating for the time being." However, the Yen did gain ground against the dollar as the Fed announced a larger purchasing plan which sent the greenback into a free fall.

The news wasn’t all gloomy for the Japanese economy as the Tertiary index improved by 0.4% as demand for information and communication services improved. Economists were expecting a 0.5% decline following December’s -1.6% print. This is a good sign for domestic growth; the Japanese economy remains dependent on exports which continue to suffer from a drop in global demand. Additionally, a 11.5% drop in Nationwide department store sales demonstrates that consumers are continuing to retrench in the face of a deepening recession—especially as growth contracted 13.4% in the fourth quarter.

The Yen has started to give back some of its gains against the dollar and has fallen to its lowest level against the Euro on the year. We may continue to see Yen weakness as the Japanese government continues to buy government bonds. The rapid deterioration of the Japanese economy may necessitate increased efforts from the central bank which will continue to be a weighing factor for the currency. The fundamental calendar won’t have the same event risk as last week, but we may get some insight into how long the economy may continue to weaken. Although the Adjusted Merchandise trade balance is expected to show a narrowing of the deficit, it will be in negative territory for an eight month. Inflation is expected to have fallen 0.1% in February which will continue to fuel deflation concerns and support the case for further quantitative easing. The BoJ’s minutes could also hint at further easing and add to bearish Yen sentiment. - JR