The Bank of Japan’s latest move to further ease its credit grip has gone largely unheeded on the currency market.

At its policy-setting board meeting early last week, the BOJ decided to raise the target for commercial banks’ reserves in its current accounts from 5 trillion yen to 6 trillion yen and increase its outright purchases of government bonds.

The move was aimed at providing interbank lending markets with almost interest-free money.

Appearing at a news conference, BOJ Gov. Masaru Hayami, known for favoring a strong yen policy, then predicted the easing would weigh on the yen’s value.

Actually, however, the yen gained ground against the dollar.

The BOJ’s decision to funnel more money into the banking system has thus far failed to provide a major lift to bank lending. That’s not surprising; lending can hardly pick up when demand remains sluggish.

With few attractive investment vehicles available at home, domestic financial institutions’ money management has largely been confined to purchases of government bonds.

They are in no mood to step up purchases of dollar-based securities either, which now entail considerable risk of foreign exchange losses.

Under the current environment, Japan’s easy money policy will not necessarily weaken the yen against the dollar.

The flagging U.S. economy is encouraging Japanese investors to unwind their long dollar positions.

The 1999 launch of the euro prompted European investors to step up purchases of dollar-based assets that then looked attractive to them.

They benefited immensely from the dollar’s rise against the euro as the U.S. economy was then expanding rapidly.

The U.S. economy has visibly slowed of late, however, and European investors appear poised to repatriate their money.

Investors have long counted on the political clout of U.S. Federal Reserve Chairman Alan Greenspan or speculation about it, but, with the U.S. financial markets trapped in a long slide, they are having second thoughts about the “Greenspan mythology,” that he can be relied upon when things get bad.

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