The yen has remained under downward pressure in recent weeks, fueling speculation that it will soon test its 1999 low of 124.75 to the dollar.

A key downside factor has been the Bank of Japan’s moves to increase liquidity in the financial system.

The BOJ decided on March 18 to bring overnight interest rates effectively back to zero by setting a higher target for commercial banks’ reserves in the BOJ’s current accounts.

The BOJ plans to keep its new policy intact until consumer prices stop falling and stabilize. Against this backdrop, international investors have been engaged actively in a carry trade, where they borrow yen in Japan and sell them for dollars or other currencies to seek higher interest returns elsewhere.

Seasonally, Japanese institutional investors tend to increase their investments in foreign currency-denominated securities in the April-June first quarter.

During his meeting with Prime Minister Yoshiro Mori in Washington on March 20, U.S. President George W. Bush called for early writeoffs of bad loans by Japanese banks.

There was speculation that Washington would indicate its tolerance of a weak yen in return for Tokyo’s commitment to accelerating banks’ disposal of nonperforming loans.

However, the joint statement issued after the summit made no mention on the dollar-yen exchange rate.

Both sides apparently sidestepped the issue of a weak yen, which would help bolster the beleaguered Japanese economy but could have an adverse impact on other Asian economies.

Still, the absence of Washington’s negative view on the yen’s weakness in the statement has been taken in the marketplace to indicate an unspoken bilateral agreement on the issue.

There is a downside risk for the dollar as well — the U.S. current-account deficit, which hit an all-time high of $435 billion last year.

Emerging as a focal point in Japan is a package of emergency economic steps to be announced April 6.

Depending on the contents of the package being worked out by the government and the ruling coalition, market participants may change their view on prospects for the dollar.

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