I had to check my screen twice and wipe the sleep out of my eyes earlier this morning to make sure I was seeing the numbers correctly on my screen. Yes, I did see the yen rate in the upper Y116/US$1 level. That's quite a reversal over just the past 5-trading days, in which the yen was actually at 119 on Tuesday.

Even though indices in Japan were up 40% last year, American investors didn't get to enjoy in all of those gains since the yen weakened against the dollar at the same time. Despite the stronger yen, everyone seemed to be optimistic in Japan earlier today as the Nikkei 225 Stock Average gained 2% and closed above 16,000 again. Typically when the yen strengthens, exporter and financial stocks have a rough day but that was not the case today.

As we move later into the morning the dollar looks like it is starting to be bought. The renewed strength of the yen nonetheless, is primarily based on the growing belief that the BOJ will end its easy monetary policy and raise interest rates as early as April. That would cut the gap between U.S. and Japanese bond rates by some but most likely not by whole lot. Still it's a move towards "normalization" in the Japanese economy as it continues to recover. The yen may also strengthen if the Fed were not to raise rates again next month. However, the sentiment now in Japan following the release of the latest Fed meeting minutes is that Bernanke will raise rates.

USD/JPY 1-yr chart (as of 02/22/06)

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Steven Towns

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