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USD/JPY- Do not forget the importance of Reserve Management

Further to an earlier update here on the EUR/USD and the USD/JPY, here is some more context and detail on the USD/JPY. Right now many analysts believe the BOJ has drawn a line in the sand at 160. Now that might be a correct assumption, but understanding why that might be the case is important. You see this analyst can remember when they did the opposite back in the 1990s and defended the dollar at 75. This analyst was trading USD/JPY back then, for a major Japanese Bank and it was exciting times. Repeatedly the BOJ stepped in to stop the USD/JPY from falling below 75 and eventually they were of course successful. So, roll the clock forward 30 years and you have the USD/JPY double that price and now they are attempting to stop the USD/JPY from rising above 160. Over the course of that 30 years, the BOJ has enjoyed a hugely successful carry trade, buying US treasury bonds, at a higher yield than they issue debt in Yen. Add that massive carry gain to a more than 100% rise in the USD/JPY over the same period and you can understand why they might want to off-load dollars at the current levels. The general expression for this folks is termed “Reserve management” as mentioned here earlier today and it is important to remember that when trying to pick through all the immediate headlines and rhetoric from BOJ officials. The USD/JPY is currently trading at 155.40

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