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What's Going on with the Japanese Yen?

Wednesday, 16 Mar 2011 | 4:27 PM ET

The Japanese Yen has been gaining strength against the dollar following the tsunami and Japan's subsequent nuclear crisis—so much so that I thought I was reading the chart backwards.

The general explanations given for the Yen's appreciation are currency repatriation and risk aversion.

In an article in the business blog City AM, Boris Schlossberg, Director of Currency Research, at GFT Forex explains:

"Currency traders have been speculating that the huge casualty damage caused by the earthquake and the tsunami will force Japanese insurance companies to repatriate funds in order to pay out the claims. At the same time, the unwinding of many speculative carry trades such as Australian dollar-yen, euro-yen and Canadian dollar-yen created a natural bid for the unit despite the horrible news from the land of the rising sun."

Schlossberg himself questions whether this exchange rate can last: "However, given the severity of the situation at Fukushima and the very real possibility that the human and economic tragedy may be far greater than the consensus view, yen could start to weaken as the focus shifts away from repatriation flows to the economic cost of recovery."

The Bank of Japan recently doubled its monetary easing policy to 10 trillion yen or $122 billion.

With the destruction of such a staggering amount of productive capacity in the Japanese economy—and the likely coming push for further rounds of emergency monetary and, perhaps, fiscal stimulus—it will be interesting to see if the direction of the Dollar/Yen trade can long endure.

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