Bank Of Japan Loses Big!
Every once in a while, the big bully on the block gets taught a lesson. It happens in grade school, it happens all the time in the movies… and it’s happening right now in the market.
What am I talking about?
The Japanese attempt to manipulate their currency.
See the big drop that just happened a few short days ago? When the Yen vs. US Dollar peaked over the $120 mark, the Bank of Japan came out guns a blazing…
They sold 1.8 trillion Yen into the market… in an effort to push the value lower. The hope is the trend will reverse and the Yen will naturally fall in value.
Unfortunately for the Bank of Japan, their attempts to bully the markets backfired. Immediately after the intervention ended, the Yen started climbing again in value.
Now this brings up a great question. Why would the BOJ try to drive down the value of the Yen?
Here’s my two cents…
Remember, Japan’s economy is primarily export based. Most goods made in Japan are shipped overseas to be sold. The strong Yen makes it harder for Japanese products to be price competitive.
For example, if you are Honda Motors, you make cars in Japan and export them overseas for sale. When you sell a car overseas, you need to bring the cash back to Japan.
Now here’s where it gets sticky…
In early 2009, the Yen/US Dollar rate was sitting near $100. So for every car you sold, you brought back a certain amount of money… you knew what it was and how to price your products to make a profit.
But then the exchange rate moves…
Just a few weeks ago, the Yen/US Dollar was trading over $120… that’s a 20% increase in the value of the Yen in just over 18 months. So now Honda Motors needs to sell that same car for 20% more… just to make the same profit!
The problem is you can’t really raise prices right now because of the poor economy. And as a consumer, are you going to fork over 20% more for the same car you could have bought 18 months ago? Probably not.
And Honda realizes consumers are price conscious.
So if Honda doesn’t raise prices, the stronger Yen eats into their profit margins. And here’s the real risk… if the Yen keeps moving higher, at some point, they start losing money on every car sold. That’s not good for Honda.
Now imagine this scenario playing out across the entire country. It’s not just Honda with this problem… but every company who exports anything. Everyone starts feeling the squeeze.
That’s why the Bank of Japan decided to intervene.
But, the Japanese intervention didn’t last long. Despite the hype, none of the other central banks helped out. The Bank of Japan is clearly on their own. And as a result, their actions failed horribly… the proof is in the chart!
Now BOJ board members are still trying to “talk-down” the currency. They keep hinting at further intervention or other easing measures… but what’s missing is action.
Now, here’s what you need to know if you’re trading the Yen…
This intervention could have two impacts on the currency. First, it could simply keep a lid on the price… as traders bid the Yen up, the central bank sells it down. This game of tug-o-war could go on for some time… days, weeks, months, no one knows.
The other option is the market realizes the Yen should be lower and we start drifting lower.
After looking at the charts, the news, and listening to the chatter, I think the first outcome is the most likely. The Bank of Japan is in for a fight over the Yen… and this time the bully might be taught a lesson.
Category: Currency Trading
