Currency Wars Continue, Japan Enters the Mix

Overnight Wednesday, the Bank of Japan intervened in the value of the yen.

The Bank opted to sell trillions of yen, a move which may have significantly contributed to the depreciation of the currency. The yen depreciated well over 2% against the U.S. dollar on Thursday, well over 1% against the euro, and almost 2.5% against the Swiss franc.

The yen’s depreciation against the franc may be especially noteworthy as the Swiss central banked conducted some intervention of its own earlier in the week.

According to the Financial Times, the chair of Japan’s most powerful business lobby—Hiromasa Yonekura—praised the move, but urged further action to keep the value of the yen subdued.

Given that Japan is an economy which is still dominated by exports, Yonekura’s praise may seem sensible. As Japan’s currency strengthens, Japanese exports may appear more expensive to foreign consumers. A cheaper yen may mean that Japanese exports benefit, which could help the broader Japanese economy recover from yet another recession.

This policy move may be somewhat similar to those followed by other major central banks, particularly those in the emerging markets such as China.

While keeping exports elevated may help to induce growth and boosts net exports in an economy, the fundamentals behind the move can be questioned. After all, with global economic conditions deteriorating, where are the consumers that will purchase these exports?

They may have traditionally been found in the United States, but this trend might be coming to an end. In recent months, sales at Wal-Mart (NYSE: WMT) have shown increasing weakness, perhaps highlighting a U.S. consumer that may be running out of money.

Wal-Mart’s CEO stated back in April that rising fuel prices were putting pressure on its shoppers, many of whom already live paycheck-to-paycheck.

With the Swiss intervening earlier in the week, and the Bank of Japan jumping into the mix Wednesday night, will the Federal Reserve decide to act?

As stocks sold-off on Thursday, investors seemed to run to the U.S. dollar, as the dollar index rallied roughly 1.5%. Similar action could be seen in the Swiss franc, as European investors purchased the currency as a safe haven amidst European turmoil.

That move may have been what prompted the Swiss central bank to intervene. As the dollar may be experiencing similar forces now, is the Fed likely to follow the precedent set by the Swiss?

Should the Fed opt to conduct some intervention of its own, the dollar may reverse its recent bull-run. Of course, if the Fed decides to hold back, new highs could be seen in the currency as fear in the global economy persists.

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