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Yen Slides on Inflation Concerns
Last week the Yen mainly saw bearish trends against its major currency counterparts. The JPY underwent sharp downtrends against the EUR and the GBP, and experienced a volatile session against the USD during the past week.
It appears that the Bank of Japan's (BoJ) statement on Thursday was interpreted by investors as a warning sign that inflation in Japan could rise dramatically over the next few weeks. The initial reaction was to avoid holding the JPY. That may have been the exact purpose of the BoJ's statement.
It is no secret that the Japanese economic chiefs are holding the stand that a weak currency is one of the main keys to pull the local economy out of recession. This is largely due to the support of the exporting sector which has an immense influence over the Japanese economy. The easiest way to try and manipulate the currency value is by cutting interest rates. However, Japan is currently holding the lowest Interest Rates in the industrial world - 0.10% - and it would be difficult to go lower. This leaves the BoJ no choice but to create speculations on rising inflation that has the potential of weakening the JPY, and it seems that they have done just that.
As for the week ahead, traders should focus their attention on statements made by BoJ Governor Masaaki Shirakawa on Wednesday. As proven this week, the BoJ is using its last resort in order to control the economy's condition, and that is done by speeches and statements. Any update on the BoJ's plans for the future will probably have an imminent impact on the Yen, and traders should be ready.
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