For weeks the large spec traders in the yen futures market have been long the yen, accumulating a 3.4 to 1 ratio long to short.  The September intervention by the Bank of Japan failed to weaken the yen for more than a week and the funds and the big specs rode the yen to a 15 year high versus the USD, testing the 80 level.  The small specs, perhaps fearing another intervention, stayed on the short side of the yen until this past period when they flipped to the long side.

This week's market action in the USDJPY, rallying from 80.53 up to the 50 day SMA of 82.76, was an unpleasant welcome in the yen market to the new small spec longs.  For weeks the Japanese government had been complaining about the economic slowdown that would result from the strong yen.  As an exporting country the strong yen was resulting in a gradual slowdown of exports, and had increased the negative business and consumer sentiment.

Following the lead of Bernanke, the BOJ announced they would embarked on their own plan to increase the money supply, hoping that an increased supply of yen would weaken that currency.  The $81.88B asset purchase program has not yet started, but as we found in the US, markets anticipate future changes in monetary conditions.

There may be more at work here than the treat of an expanded money supply, however.  Left along, as Milton Friedman taught, and given some time, markets usually find their own solutions to problems.  In my comments from Oct. 28th the intend of the BOJ when I noted:

"The Bank of Japan may want to consider buying foreign currency assets to help ease the yen's appreciation, economic and fiscal policy minister Banri Kaieda said.  "Such purchases can be an option for the central bank over the medium to long term," Kaieda said in an interview in Tokyo on Friday. "They would be effective" in curbing the Japanese currency's gains, he said."..........(my comments) Buying currencies to lesson the yens value did not work but using the high valued yen to buy cheaper foreign assets might prove quite effective over a longer term......Though the chart looks terrible, we do not want to be sell the USD versus the JPY at these levels (around 80)."

In today's The Japan Times Online, Kyodo News  reported:

High yen has companies looking toward Asia

"An increasing number of Japanese companies are capitalizing on the globalization trend and strong yen to raise funds or acquire businesses in Asia....."

The article noted that Japanese companies were investing in a variety of companies in South Korea, Taiwan, and China, taking advantage of the strong yen and Japan's capital accounts surplus.  Poor return on capital in Japan is another motivating reason.

There are also rumors that the Chinese, who earlier this year had bought Japanese debt, had been recent sellers of that paper.  The Chinese have been more aggressive this year in selecting the right currency for their currency surplus.  Since Japanese notes pay little interest, this had to be a currency play, and perhaps the avoidance of USD longs positions.

With the uncertainty of the pending G-20 meeting casting an uncertain shadow over markets this week, we look for continuing volatility.  Should the yen again weaken against the USD to the 81.30 level,  we wish to try the long side of the USD there.  There are some Japanese willing to invest the high price yen, and there may be an abundance of USD shorts both versus the yen and other currencies  that might cause USD buying.

Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.