The yen fell to a four-year low against the dollar today as the Japanese central bank put its ambitious plan to double the ailing Far Eastern economy’s money supply into action.
The Bank of Japan conducted its first government bond-buying operation this morning, purchasing 1 trillion yen’s (£6.61 billion) worth of medium-dated debt and 200 billion yen of 10-year bonds. In response, the yen sank to its lowest level since 2008 against the dollar, touching 98.85 at one point in trading. The Nikkei 225 stock index also rose 3.1% to a five-year high, driven by gains for exporters, which stand to gain from a weaker yen.
Traders appear to have been taken by surprise at the speed with which the bank has moved to implement the plan it announced last week to inject the equivalent of $1.4 trillion into the Japanese economy.
“This has really shaken up many people’s attitudes toward the BOJ and the new government,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York. “It feels like it’s gathered a whole new momentum behind it, as the doubters have joined the bandwagon and it’s becoming a self-fulfilling prophecy.”
City analysts predicted that the dollar could soon break through the 100-yen mark.
Last week the new Tokyo central bank chief, Haruhiko Kuroda, announced his intention to double the Japanese money supply over the next two years in order to break a two-decade long run of stagnation and deflation in the world’s third-largest economy. Prime minister Shinzo Abe is complementing the work of the central bank with a fiscal stimulus funded by further government borrowing. The central bank’s quantitative easing helped to push the Japanese government’s 10-year bond yields down 2 basis points to just 0.52% in trading.
Traders expect the stimulus to encourage Japanese investors to pull money out of low-yielding domestic assets and invest in overseas assets, which should support equity and bond prices in Europe and America.