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How can yen’s fall after additional monetary relaxation stop?

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Yen is falling rapidly against USD after Bank of Japan announced an additional monetary relaxation plan on Friday of last week. It’s not surprising even if yen goes down further in the future as FRB has already finished its QE3. However, the reality does not go as simple as that.

Japanese yen is losing its value so fast after surprising announcement by BoJ to ease monetary policy more. Although USDJPY was at 109 yen level before announcement last Friday, it came to 112 yen level at the end of last week and exceeded 114 yen on November 4. This is the lowest rate for yen in about 7 years after the end of 2007.
FRB finished QE3 on October 30 and will try to squeeze monetary by raising rates next year. Japan, on the other hand, is expected to keep easing monetary. With these factors, it’s possible that yen fall further against USD in the future. But there are some factors which could change this projection.

The first factor is US economy. Many analysts predict that FRB will start hiking rates in 2015. But it’s possible only if US economy keeps recovering. If US economy slows down for some reasons, rate hike will be postponed or even cancelled. US economy has been recovering since the beginning of QE3. Unemployment is now below 6%. But it does not necessarily mean that US economy keeps recovering in the future.

The second factor is how weak yen affects Japanese economy. If yen declines below 110 yen, it will more negatively affect Japanese economy. When the exchange rate was 80 yen against USD, everyone in Japan thought that yen was too high. It was not wrong to push down yen by easing monetary since then. But with yen at 110 yen level, more companies think that yen’s further decline will affect their business rather negatively.
When yen was 109 yen against USD at the end of September, Chairman of Japan Business Federation Sakakibara said that it will affect Japanese economy negatively if yen goes down more. And Chairman of Japan Chamber of Commerce and Industry Mimura said on November 4 “Yen is too low“. Business leaders express concern over low yen like these. There must be many small business owners who feel the same way.
If concern like this increases, BoJ must make decision between decreasing the amount of asset purchase and doing it by ignoring these voices. If BoJ chooses the former, it means that its additional monetary relaxation was a failure.

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