Early Friday morning, the Bank of Japan will meet to discuss monetary policy amidst calls from political leaders for the central bank to do more. As Japan’s growth slows and the Japanese yen remains strong, the deflationary forces continue to be a major problem for the Bank of Japan despite a new quantitative easing program announced on September 28th. At that meeting, they announced they would expand their asset purchase program by JPY10trn to JPY55trn and eliminate the 0.1% minimum interest rate requirement for government bond purchases by the central bank. While the initial reaction was mixed, we have seen the US dollar strengthen against the Japanese Yen.
However, I believe this has more to do with the belief that more is coming from the central bank and the government. As an example, Japan’s new Economics Minister Seiji Maehara is a strong advocate for allowing the Bank of Japan to buy foreign bonds. Also, there is appears to be a growing belief that the Bank of Japan/Ministry of Finance is examining the Swiss National Bank’s currency intervention program to see if that could work for Japan. This could take two forms: buying US dollars against the Japanese yen or buying Euros against the Japanese Yen. Of course, it comes with a risk that either the US or Europe will be upset and fill a WTO suit. To get around this, the bond buying would be a perfect way to say they are merely providing liquidity to the financial system. As an added bonus, the Ministry of Finance can say they are buying European bonds to support Europe during their crisis while at the same time buying EUR against JPY to keep Japanese exporters competitive against European exporters.
To me, Japan must do something soon on the currency to help their economy. They have tried QE and it is not providing the benefits they desire. The most direct path is to stabilize the currency for their export driven economy before more manufacturers leave the country. This is a conclusion that Switzerland came to and now has a floor at 1.2000 for the EUR against the CHF.
Here’s my trade:
Buy EUR ag JPY
Entry 101.50 (more aggressive 102.00)
S/L 99.45
T/P 107.50
While the T/P seems to be more of a dream, this trade is a play that a major shift is coming from Japan on the currency.
