The Japanese ¥ became the lightening rod of financial stress

Last week the Japanese ¥ became the lightening rod of financial stress that threatened to push the country back into deflation. The currency had grown by 9% against the US$ since the Bank of Japan (BoJ) cut interest rates at the end of January to below 0% for the first time.

The value of the ¥ rose as safe haven flows poured into the country whipping out all the depreciation effects of the “weak Yen” policy over the past fifteen months. The Japanese authorities are losing their ability to drive down their currency and counter the grip of deflation. Negative interest rates have therefore backfired and hurt the BoJ. This development has been a disaster for Governor Haruhiko Kuroda who pushed through the negative interest rates against strong protests from half the banks voting board members.

The ¥ position has been amplified by the effects of quantitative easing. The bank has been buying backUS$70bn of government bonds each month and has now bought about 1/3 of the countries US$9.3tr public debt.

This decline in interest rates and low bond yields has pushed Japanese Banks, life insurers and pension funds to move out of government bonds and into equities as a deliberate policy to push down the Yen. Unfortunately for these new equity investors Japans main Nikkei 225 index has fallen heavily on the rise of the Yen and the lack of control the country seems to have over deflation.

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