After intervening for the first time in six years, the Bank of Japan seems reluctant to take the next decisive step to prevent the currency rising further against the dollar
Japan is facing an uphill battle to prevent the yen from revisiting levels not seen since April 19 1995, but recent events may have already doomed the Japanese currency to a further rise against the greenback.
First, there was intervention. When the Bank of Japan (BoJ) engaged in a lone mission to pump more than US$25 billion (Dh91.82bn) into the foreign exchange markets and prop up the dollar in the days following September 15, the market duly took note of the first round of Japanese intervention in more than six years.
The intervention was made at levels where the dollar bought just less than •83 and dragged the US currency back to •85.78. Unchallenged dips below •83 had contributed to the dollar dipping to •79.75 in 1995, and dealers held off as the Japanese authorities appeared to signal the level was their renewed line in the sand.
Surely, more was to come - as it had up until 2004. But there was no follow-up dollar buying, and the euphoria was over too soon.
Japanese dollar buying was done without any co-ordinated action from the Federal Reserve Board (FRB), which along with the Treasury department appears to have jettisoned its strong dollar rhetoric in favour of the benefits of expanded exports fuelled by a cheap currency.
The dollar was back buying just •84 within two weeks of intervention.
It has also been suggested that while Timothy Geithner, the US Treasury secretary, was prepared to condone one-off yen selling intervention by Japan, he viewed any follow-on selling as a sign Tokyo was jumping into the currency wars that have recently seen Brazil, China and Korea artificially force down their currencies to boost exports.
Given the need for ongoing close policy co-ordination between Japan and the US, particularly as it relates to the Chinese yuan, Japan is unlikely do anything on the currency front that would raise the shackles of Washington.
And having ridden out meetings of the Group of 8 industrialised nations relatively unscathed, any thoughts of more intervention may be shelved until as far ahead as meetings of the Group of 20 developed and emerging economies on November 11 and 12 in Seoul.
Second, the BoJ failed to convince the markets that it was prepared to take the necessary steps to stop the persistent onslaught of deflation.
There was an initial surprise on October 5 when the Japanese central bank emerged from scheduled policy meetings with what looked like a double-punch against deflation.
The BoJ reverted to zero interest rates for the first time in more than four years, and announced a fund of about $62bn for the purchase of assets, including corporate bonds, exchange-traded funds and property investment trusts.
While the unorthodox nature of the package fed hopes that the Japanese authorities might have more tricks up their sleeve to put the export-reliant economy back on the recovery track, a closer look at the contents revealed it to be less impressive than at first thought, and a little too leisurely on the execution front.
The scope of the much-vaunted buying fund amounts to a mere 5 per cent of the BoJ's balance sheet, which pales in comparison with the FRB that has already doubled the size of its own balance sheet, and leads to questions about the level of BoJ commitment.
Lingering doubts concerning the economic impact of merely pumping more cash into the financial system without any assurances that banks lend out more to companies were underscored by the fact that asset purchases will be paced over a full year. Short of sizable expansions, the fund is seen lacking the oomph to overtake deflation,
The consensus is that the BoJ moves were little more than a wait-and-see posture ahead of the federal open market committee (FOMC) meetings in Washington on November 2 and 3. In other words, Masaaki Shirakawa, the governor of the BoJ, has lofted a high and slow ball towards the Federal Reserve's side of the court and is waiting to see how Ben Bernanke, the chairman, returns it.
But, Mr Bernanke clearly plays on a faster court and appears to have telegraphed his shot in remarks on October 15. The dollar dipped below •81 following his comments that "there would appear - all else being equal - to be a case for further action".
The greater chance for US rates to fall leaves the greenback with more room to slide against the yen, and dips below the •80 level, and a possible revisit of •79.75, must be said to be on the cards in the coming weeks.