The Bank of Japan stole a march on the U.S. Federal Reserve this week, in part because of concern over the strong yen -- but, ironically, the move will likely drag the dollar down further against the Japanese currency.
Japan's central bank surprised markets Tuesday by dropping its policy rate to a 0.00%-0.10% range, from 0.10%, and announcing that it will buy a wide range of assets, including more government bonds.
That has increased speculation that the Fed will take bold measures of its own, making the dollar even more unattractive. Since U.S. Treasury yields have more room to fall than their Japanese counterparts, which already are at ultra-low levels, expectations for a second round of Fed quantitative easing will weigh on the dollar/yen leading up to the U.S. policy-setting meeting Nov. 2-3.
That unintended outcome is unfortunate for Japan, whose export-driven economy is generally hurt by a stronger yen. A day after the BOJ move the dollar fell to a fresh 15-year low at Y82.75, frustrating Tokyo's efforts to revive its economy. The yen has now recouped all of its losses that followed Japan's massive intervention on Sept. 15.
The BOJ's latest move has some analysts talking about 'competitive easing.' The idea is that the BOJ and Fed will try to outdo each other in loosening monetary policy to weaken their own currencies.
The BOJ could certainly ease more, but it only stands to lose in any contest where success is measured by how low the central bank can push yields and the local currency.
A grim jobs market and deflation risk provide the Fed with all the reasons it needs to ease more. And there's no doubt an even weaker dollar would be welcome in Washington, where President Barack Obama earlier this year announced a goal of doubling exports in the next five years.
The BOJ may have thought its rate cut would help Japanese exporters, but in fact it's U.S. exporters who owe the BOJ a round. The day after the BOJ step raised expectations of a corresponding Fed move, the ICE Dollar Index, a key gauge that measures the greenback's performance against a basket of currencies including the yen and the euro, fell to its lowest level since January at 77.301.
The spread between 10-year U.S. and Japanese government bonds, a key driver of the dollar's performance against the yen, is likely to narrow further, to the dollar's detriment.
The benchmark 10-year Treasury yield fell Wednesday to 2.357%, its lowest level since January 2009, but it still has plenty of room to fall. In contrast, the 10-year JGB yield appears to be bottoming out after hitting a seven-year low Wednesday at 0.820%; there's not much further it can drop, after all.
This all suggests the downtrend in dollar-yen will not abate. For the BOJ, it means that the battle to hold down the yen may get much trickier ahead.
Japan's central bank surprised markets Tuesday by dropping its policy rate to a 0.00%-0.10% range, from 0.10%, and announcing that it will buy a wide range of assets, including more government bonds.
That has increased speculation that the Fed will take bold measures of its own, making the dollar even more unattractive. Since U.S. Treasury yields have more room to fall than their Japanese counterparts, which already are at ultra-low levels, expectations for a second round of Fed quantitative easing will weigh on the dollar/yen leading up to the U.S. policy-setting meeting Nov. 2-3.
That unintended outcome is unfortunate for Japan, whose export-driven economy is generally hurt by a stronger yen. A day after the BOJ move the dollar fell to a fresh 15-year low at Y82.75, frustrating Tokyo's efforts to revive its economy. The yen has now recouped all of its losses that followed Japan's massive intervention on Sept. 15.
The BOJ's latest move has some analysts talking about 'competitive easing.' The idea is that the BOJ and Fed will try to outdo each other in loosening monetary policy to weaken their own currencies.
The BOJ could certainly ease more, but it only stands to lose in any contest where success is measured by how low the central bank can push yields and the local currency.
A grim jobs market and deflation risk provide the Fed with all the reasons it needs to ease more. And there's no doubt an even weaker dollar would be welcome in Washington, where President Barack Obama earlier this year announced a goal of doubling exports in the next five years.
The BOJ may have thought its rate cut would help Japanese exporters, but in fact it's U.S. exporters who owe the BOJ a round. The day after the BOJ step raised expectations of a corresponding Fed move, the ICE Dollar Index, a key gauge that measures the greenback's performance against a basket of currencies including the yen and the euro, fell to its lowest level since January at 77.301.
The spread between 10-year U.S. and Japanese government bonds, a key driver of the dollar's performance against the yen, is likely to narrow further, to the dollar's detriment.
The benchmark 10-year Treasury yield fell Wednesday to 2.357%, its lowest level since January 2009, but it still has plenty of room to fall. In contrast, the 10-year JGB yield appears to be bottoming out after hitting a seven-year low Wednesday at 0.820%; there's not much further it can drop, after all.
This all suggests the downtrend in dollar-yen will not abate. For the BOJ, it means that the battle to hold down the yen may get much trickier ahead.