Recent weakness in equity markets has been due to some poor domestic data from the US. Quite why this should be such bad news is something of a puzzle as we are not looking to domestic demand for growth in the US. Eventually, strong growth in Asia and other emerging economies should be reflected in the US external sector sooner or perhaps later. But no matter, investors want 'safe assets' such as bonds. They are also buying the yen, the logic of which escapes me. It is possible that what we are seeing is the unwinding of ‘carry trades’, which creates an artificial and temporary demand for yen.
In response, the Bank of Japan did take some small steps to increase monetary stimulus – by extending the time horizon of their monetary operations, allowing commercial banks to borrow funds for a duration of six months at very low interest rates. Such is the nervousness of financial markets that it had minimal impact and the yen has continued to appreciate.
With a bit of luck, or false optimism, the continuing strength of the yen might force the BoJ to do something a bit more drastic, which would help not just the Japanese but the rest of us. More likely, the defeatist attitude that there is nothing they can do will prevail.
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