Now that the Swiss National Bank has a currency cap, many in the market are wondering if the Bank of Japan will follow suit.  The USDJPY exchange rate has broken through record levels over the last several months leaving Japanese exporters and Ministry officials worried about the economic costs to come.  But, could this really happen?

Not likely.

The two global economies are considerably different when compared side by side.  And, Japanese officials are unlikely to support such a measure given their own global agenda.

Although the Bank of Japan is world renowned for its ability to print money, even their policymakers know the damage that can be done by overprinting – in order to meet the cost of maintaining such a measure.  Not only would a pegged currency cost a lot to implement, in the end it would defeat a purpose that policymakers have been working on for years – deflation.  In the last decade or so, the country has been mired in low rates of growth and high rates of money supply.  If the country were to implement a restrictive currency policy, the economic environment would only become worse.

This is different when compared to the Swiss economy, which has rebounded from the depths of the 2008 crisis.  Since then, growth has been higher by 2.5%-3% on average for the Swiss economy – compared to Japanese economic contraction of 1% last quarter.  Now, I’m not saying that a higher growth rate should be a green light when it comes to costly monetary programs.  But, it’s just not in the best interests of Japan for the BOJ to implement a similar program right now.

Plus, when taking a look at how the foreign exchange market is structured, it’s easy to see why Japanese officials are bit calmer than their Swiss counterparts.

The Japanese yen is the second most traded currency among the major pairs – second only to the Euro and third when taking into account US dollar transactions.  This is compared to the Swiss franc, which ranks as the sixth most traded currency, with market share that is almost six times less than the Japanese yen.  With a smaller market, the Swiss franc can be prone to speculative direction.  On the other hand, given the size of its market, the Japanese yen rate wouldn’t be subjected to such anomalies or extended directional trends.

But, more importantly, the Bank of Japan would come under intense scrutiny by the G-7 community if Japanese officials decided to implement a protective peg on the Japanese yen.  Everyone remembers how hard it was for China to escape global finger pointing and criticism.  The Bank of Japan has had its fair share in the past and will not likely make any moves to rock the boat – especially ahead of this week’s global finance ministers meeting in Europe.  With the heads of the G-7 countries scrutinizing every other country’s moves, a Japanese yen peg would call into question the membership of Japan among other global industrial nations.

Source:  FXAlliance Charts

Given the major economic differences and the political incentives, it’s hard to see why the Bank of Japan would even think about attempting a yen peg of some kind.  This will likely keep the USDJPY currency pair under pressure with support at 76.50 for now.

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