After the BOJ Brings out the Big Gun, Currency War?

The Bank of Japan (BOJ) expanded their monetary base on Friday with additional Japanese Government Bond (JGB) purchases. This is sparking a debate of further local currency wars. After the announcement, the yen imploded and other export countries are concerned how a sinking yen will affect their exports.

Whenever a central bank, like the BOJ, makes a big move like this, there is always fallout. Financial markets were surprised as nobody expected this move on Friday. The BOJ is expanding their exchange traded funds (ETFs) purchases as well as it purchases in real estate investment trusts (REITs). They also extended their JGB purchases increasing their duration of time. Finally, the BOJ is increasing their monetary base expansion.

The Nikkei, Japan’s benchmark surged over five percent after the announcement. The yen imploded and lost three percent versus the U.S. Dollar. The last trade, at the time of this report, for the USD/JPY Forex pair was at ¥112.51. Buyers are now eyeing above 114.00.

There is already a currency war going on between the South Korean won and the Yen. This is the one to watch as the yen/won Forex pair is very sensitive to moves like this. They compete in many key areas, like electronics, smartphones and computers. The yen has lost near twenty percent versus the won since the BOJ embarked on its unprecedented stimulus program back in 2013.

Now that the BOJ has done this move the Bank of Korea (BOK) could enact more defensive measures to support their local currency, the won. They will either directly intervene in the Forex market or cut rates. They are more than likely to cut its benchmark rate 25 basis points to 1.75 percent. This could happen in the first quarter of 2015 if not in December. South Korea’s exports are up 25 percent from last October following the 6.9 percent expansion in September. These are both annual numbers.

The BOK has been very vocal about the yen’s depreciation. They are not happy with the negative impact on their exports and slower economic growth. They are also see low inflation coupled with a weak yen a direct threat to their economy and corporate expansion.

We could also see countries like Taiwan and China enacting economic policy to limit the strength in their respective currencies. Both are big export nations. China’s exporters will not be happy with the ever weakening yen and Beijing could act to bring their own currency, the yuan, lower. As of right now, the People’s Bank of China (PBOC) has fixed the yuan’s trade range at a midpoint of 6.1525. This is below Friday’s level at 6.1461 and below the close at 6.1135.

With that said, Korea has a bigger issue with Japan and the weakening yen. The PBOC and BOJ tend to play nice together. China is more concerned over the Dollar to Thai bhat Forex pair as well as where the Vietnamese currency, known as the dong, is trading.