The world is in full pandemic mode due to the COVID-19 outbreak. Just three months into the phenomenon, world economies are in panic mode. Central banks are deploying both conventional and unconventional tools to fight recession. In Japan, as it is elsewhere, the Bank of Japan is willing and ready to extend, and even to deepen, the quantitative easing program to prevent a recession.
Yen is weakening against the greenback
In the opening weeks of March, traders were all out buying safe haven currencies to hedge against market turmoil. However, it seemed as if traders favored the US dollar over the Japanese by the second week. By 9 March 2020, the USD/JPY pair grossed at 102.082, having fallen 8.93% from 20 February 2020. However, panicky traders looking to hoard US dollars changed the direction of the pair. Between 9 March 2020 and 23 March 2020, the USD/JPY pair rallied 8.20% to settle at 111.205.
Japan’s debt burden is too heavy for the market to ignore
Nonetheless, a weaker Yen does not seem like the answer for Japan’s sick economy. For years now, the Bank of Japan has deployed various tools to ground the yen as well as stabilizing an economy that hugely relies on exports. However, the BOJ seemed unable to control the rising yen as many traders snapped it up. Traders consider the yen a safe bet during a downturn. As such, one would expect the currency to firm as the pandemic sets off economic fires across the globe.
Now that the yen happens to be weaker than it was a week ago, should the BOJ celebrate? Perhaps not. This is because the phenomenon that is currently unfolding is unique. Like all other central banks, the BOJ will need to stimulate its economy. For instance, Japan is set to kick off a massive asset buying program to stabilize the credit market. However, the country’s debt burden is already heavy enough. While the program might help in the short-run, the country might face a bigger problem after the coronavirus scare dissipates.