The dollar, having risen to close to 127 yen in early April, has given up much of its recent gains and is now hovering around 120 yen.

The currency market reacted positively to the inauguration of the reformist Cabinet of Prime Minister Junichiro Koizumi, but the optimism is beginning to run low.

For those who expected the Koizumi administration to press forward with a sweeping restructuring program quickly, recent developments on the political front have been a letdown.

With the end of the current ordinary Diet session drawing near, the passage of a bill to set up a stock-purchasing institution and help banks clear their bad-loan mess appears unlikely.

For the dollar, one key downside factor was U.S. interest rate cuts.

On May 15, the U.S. Federal Reserve lowered the discount rate to 3.5 percent and the target for the federal funds rate to 4 percent, pointing to the faltering economy.

The fifth half-point cut in the key interest rates in as many months is now widely expected to be followed by a quarter-point cut late next month.

In Japan, attention has focused on financial institutions’ lukewarm response to the Bank of Japan’s offers to buy commercial bills.

Apparently alerted by a shortfall in sell offers from commercial banks, the BOJ announced steps last week to improve its open market operations to bring the liquidity in the banking system to the targeted level.

Soon after the BOJ announced the decision, however, the yen came under selling pressure.

There was speculation some time ago that the government would opt for a weaker yen to export its way to an economic recovery.

However, a recent news report quoted former Finance Minister Kiichi Miyazawa as calling for yen-buying intervention while he was in office.

Given the falls in Japan’s trade surplus over the past 10 months and the BOJ’s gloomy assessment of the economy, the possibility of intervention cannot be ruled out entirely.

Conventional wisdom holds that Tokyo stocks and the yen move higher in June.

The yen may crawl out of the current 120-125 range and test 117-118 in the near term.

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