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Bank of International Settlements: Yen’s Value is ‘Anomalous’

June 26, 2007
By Ken Worsley


In its annual report, the Bank of International Settlements expressed the opinion that the yen’s weakness is out of line with where it should be, stating, “There is clearly something anomalous in the ongoing decline in the external value of the yen.” The BIS recommended that the Bank of Japan tighten its monetary policy.

The problem, according to the BIS, and reported this morning by the Nikkei, appears to be that investors see no sign that the yen will be allowed to appreciate in value any time soon. At a news conference this morning, Finance Minister Koji Omi told reporters, “Exchange rates should reflect economic fundamentals and the Japanese economy remains in good shape on a recovery track.”

That’s not the first time we’ve heard this line. After giving his standard line, Omi was asked whether or not the yen’s current rate reflects economic fundamentals, but refused to comment.

How much of the carry trade seems to be psychological? This interesting tidbit was buried in the BIS report:

Given that Japanese retail investors hold the bulk of their wealth in yen, they are not as sensitive to the risk of a sudden rise in the value of the yen as leveraged investors who short the currency. They are therefore less likely to unwind their foreign currency investments during episodes of exchange rate volatility. Indeed, market commentary suggests that Japanese retail investors took advantage of the yen appreciation associated with the most recent rise in volatility to increase their exposure to high-yielding overseas assets. - Chapter 5, page 6

In other words, despite comments from Bank of Japan Governor Toshihiko Fukui that the bank may raise interest rates even when consumer prices show no rise, investors still don’t see interest rates, and by extension, exchange rates, moving much any time soon. They’re buying on discount, thinking the stronger yen is a better buy point because it can only get weaker. They’re catching on.

Filed Under Exchange Rates, Forex, Interest Rates, Monetary Policy 

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Comments

One Response to “Bank of International Settlements: Yen’s Value is ‘Anomalous’”

  1. Klausten on June 27th, 2007 2:01 am

    Maybe he hadn’t read the BIS report yet. It looks like they got around to it later in the day:

    INSIDE VIEW: MOF No Longer Sees Weak Yen As ‘Acceptable’

    the ministry revised a speech on forex rates being prepared for Finance Minister Koji Omi by adding the phrase “We will keep a watchful eye on foreign exchange rates” to a statement saying that “Foreign exchange markets should reflect Japan’s economic fundamentals.”

    Monetary authorities fear that the yen’s excessive depreciation may prod European and other nations to force Japan to correct current forex rates, which the Japanese government sees as “comfortable.”

    But more importantly, they are concerned that a former vice finance minister for international affairs was right when he said, “The weak yen symbolizes the shrinking presence of the Japanese economy (in the world),” adding that “it is obviously bad news.”

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