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Yen intervention on the horizon

As the Japanese yen looks weak government ministers debate whether or not to step in

With the yen at historic highs against the US dollar, the spectre of intervention begins to loom. The government can make moves to ease the prospect of inflation, something the devastated nation certainly doesn’t need at this time. However, the yen recently began to ease against the dollar, diminishing “the possibility for further easing,” according to a currency strategist at Wells Fargo in New York.

The yen fluctuates in value relative to other world currencies. Currencies may be fixed (based on a fixed asset such as gold) or floating (changes in relation to other currencies), and each country decides how it will address its own currency. Countries have changed from fixed to floating in the past, often due to inflationary pressures or a need for political stability. Forcing a currency to remain pegged against a static asset can result in higher inflation, higher unemployment, and a lower value to the currency.

The yen is a floating currency and has historically had a close relationship to the yields of US Treasury securities. However other global factors, such as the European debt crisis, can and have had an impact on the valuation of the currency. For years, the yen has been measured against the dollar, but with the United States promising to keep interest rates “exceptionally low” through the end of 2014, this places additional pressure on the yen.

Japan has been a great investor in US assets, such as Treasury Certificates, and lower yields on those investments will bring less cash into Japan’s treasury coffers, providing far less return than has been seen in the past. Add to that the need for capital to help recover from the Japanese earthquake and tsunami, and the pressure begins to mount for more robust investment. Of course, that carries some risk – as investors in Greece have found out much to their dismay in the past few years.

Now that Greece’s rulers have rejected further austerities, it is likely the next round of bailout funds will not be delivered, pushing Greece further toward default. If and when it happens the upset this will cause the market will send investors looking toward more stable governments and currencies, the Japanese yen among them.

Asian stocks have been rising, in general, because they are seen as a safe haven. Angus Gluskie, Managing Director at White Funds Management in Sydney, has said, “Things aren’t great but it’s getting better,” regarding the outlook on Greek versus Asian exchanges. Additionally, Japan Tobacco recently raised its profit forecast and Japanese shipping companies are predicting improvement in earnings.

Kathy Lien, Director of Currency Research at GFT Forex in New York, has stated that, “The pressure to intervene in the yen is receding with each rally in dollar-yen,” and so long as the trend continues, the markets likely will be allowed to react naturally. The yen has had the third-best performance among the ten developed-nations currencies, according to the Bloomberg Correlation-Weighted Indexes, meaning the outlook for the yen over the next 12 months remains positive.