Wednesday, September 21, 2016

Potential Yen Breakout

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*BOJ related their bond purchases to yields. They may buy fewer bonds in that scenario.
*That would require less currency.
*That should push the yen higher.

The BOJ had announced what appears to be bold moves but it could cause less currency printing. It appears that instead of buying bonds at any price they would try to have bonds trade at a zero yield. Japan has been trying to find excuses to weaken their currency to spur their economy. Bond buying was one way. By saying that they don't want to take yields deeper into negative territory may mean they will buy fewer bonds. That would be as long as inflation remains low. This could help break out the yen.
Bond Buying An Excuse To Print And Weaken The Yen
The Bank of Japan ("BOJ") has been on an aggressive attempt to weaken the yen. Weakening the yen would drive exports and help inflation by making imports more expensive. After early luck the yen has gone against them.
New Plan Could Ultimately Hold Back Yen Printing If Inflation Stays Low
It has been reported many times that the BOJ has cornered the bond market. They own about one-third of Japanese government bonds. There have now been a lack of sellers. Without bonds to buy they can't find excuses to print money.
They don't want to sell yen into the open market because they'll get tagged a "currency manipulator." They'd likely see trade fines and tariffs which could further hurt their economy. For that reason they are trying to find any other uses as an excuse to print currency.
For now though they shift their focus on keeping bond yields at zero for a longer time frame. Their hope is that confidence and the economy build.
What it implies for the yen is a stepping back from buying bonds at any cost. They appear that they will stop buying bonds if it pushes yields negative. They don't want to hurt their banking system profits further. That sets a limit to their bond purchases which can hold back the yen printing presses. A holding back of yen supply is bullish for yen.

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