Japanese Yen Makes A Comeback Amidst Return To Risk Aversion

The Japanese yen made substantial gains today as a bout of risk aversion permeated throughout the forex, bond, and equity markets. News that the S&P may cut ratings on $12 billion worth of subprime mortgage-backed bonds sent traders flocking to safer havens, as USDJPY and NZDJPY plunged over 100 points towards 122.00 and 95.00, respectively.

With interest rates in Japan still at an ultra-low 0.50 percent, today?s price action signals that a rate hike by the Bank of Japan may not necessarily be needed in order to initiate a massive unwinding of carry trades and confirming the dangers associated with maintaining highly leveraged trades. Such one way bets will also encounter event risk this week as the BOJ is scheduled to meet on Thursday. The central bank is widely expected to leave rates steady this month, especially as the economy remains in deflation and with the LDP elections occurring at the end of the month. So does this mean BOJ Governor Fukui will move to normalize rates in August? There is certainly speculation that he and his fellow policy makers will discuss such a move, but they will face substantial resistance from the government, as officials such as Kozo Yamamoto and Shigeyuki Goto have recently spoken out against such measures.