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Lesson 3

Factors Affecting Major Currencies

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Ministry of Finance: The MoF is the single most important political and monetary institution in Japan. Its influence in guiding the currency is more significant than the ministries of finance of the US, UK or Germany, despite the gradual measures to decentralise decision-making. MoF officials often make statements regarding the economy that have notable impacts on the yen. These statements include verbal intervention aimed at avoiding undesirable appreciation/depreciation of the yen.

Bank of Japan (BoJ): In 1998 Japan passed laws giving its central bank (the BoJ) operational independence from the government (the MoF). Complete control over monetary policy has shifted to the BoJ, while the MoF remains in charge of foreign exchange policy.

Interest Rates: The Overnight Call Rate is the key short-term inter-bank rate. The call rate is controlled by the BoJ’s open market operations aimed at managing liquidity. The BoJ uses the call rate to signal monetary policy changes, which impact the currency.

The Ministry of Finance is the single most important political and monetary institution in Japan.

Japanese Government Bonds (JGBs): The BoJ buys 10- and 20-year JGBs every month in order to inject liquidity into the monetary system. The yield on the benchmark 10-year JGBs serves as a key indicator of long-term interest rates. The spread, or the difference between 10-year JGB yields and yields on US 10-year Treasury Notes, is an important driver of the USD/JPY exchange rates. Falling JGBs (rising JGB yields) usually boost the yen and impact the USD/JPY.

Economic and Fiscal Policy Agency: As of 6 January 2001, the Economic and Fiscal Policy Agency officially replaces the powerful Economic Planning Agency (EPA). It is a government agency responsible for formulating economic planning programs and coordinating economic policies such as employment, international trade, and foreign exchange.

Ministry of International Trade and Industry (MITI): The MITI is a government institution whose aim is supporting the interests of the Japanese industry and defending the international trade competitiveness of Japanese corporations. The MITI’s power and transparency is not as significant as it used to be back in the 1980s and early 1990s, when US-Japanese trade issues were the “hottest” topic in the FX market.

Economic Data: The most important economic data items from Japan are: GDP, Tankan survey (quarterly business sentiment and expectations survey), international trade, unemployment, industrial production, and money supply (M2+CDs).

Nikkei-225: Japan’s leading stock index. A reasonable decline in the yen usually lifts shares of export-oriented companies, which tends to boost the overall stock index. The Nikkei-yen relationship is sometimes reversed, where a strong open market in the Nikkei tends to boost the yen (weighs on USD/JPY) as investors’ funds flow into yen-denominated shares.

Cross Rate Effect: The USD/JPY exchange rate is sometimes impacted by movements in cross exchange rates (non-dollar exchange rates) such as EUR/JPY. To illustrate: A rising USD/JPY (rising dollar and a falling yen) could be the result of an appreciating EUR/JPY, rather than a direct rise of the dollar. This rise in the cross rate could be highlighted due to contrasting sentiments between Japan and the Eurozone.

Another example: Both the EUR/JPY and EUR/USD rally because of a general strengthening in the euro. For some particular factors (such as better prospects in Japan) this could have a larger impact on the dollar than it does on the yen. As a result, the USD/JPY weakens since the yen is relatively less hurt by the appreciating euro.


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