The yen plunged to its lowest level in more than three months against the dollar after the Bank of Japan unexpectedly expanded its asset-purchase program.
Japan's central bank caught markets off guard by ramping up its bond buying by an additional ¥10 trillion ($128.92 billion), and set a de facto inflation target in an effort to pull the country out of its deflationary spiral. The asset purchases undermine the yen by increasing the money supply, much like the bond buying undertaken in 2010 by the Federal Reserve weakened the dollar.
With the yen already under pressure because of Japan's grim economic fundamentals, the news encouraged traders to snap up dollars. The greenback shot up by more than 1%, with its session high of ¥78.54 marking the yen's weakest point since Nov. 1, the day after the Bank of Japan launched an intervention to knock the yen back from post-World War II highs.
Late Tuesday in New York, the dollar was at ¥78.44, down from ¥77.57 late Monday. The euro was at $1.3131 from $1.3187. The pound was at $1.5694 from $1.5766, while the dollar bought 0.9195 Swiss franc from 0.9164 franc late Monday.
Analysts, however, predicted the yen soon would begin to edge higher again, especially because the world's largest economies are embarking on what Deutsche Bank on Tuesday called "competitive quantitative easing," or bond buying. There is speculation that the Federal Reserve may launch a third round of bond buying.
"I don't think in the long run [a weak yen is] going to be sustainable, with the prospect of QE3 still on the table," said Chris Fernandes, vice president and FX adviser at Bank of the West in San Francisco.
Because worries about Greece's debt still are sending traders in search of haven currencies, "I foresee risk aversion rearing its ugly head again," Mr. Fernandes said, which will drive investors back to the yen.
The Bank of Japan's decision was the latest in a series of moves demonstrating Japan's resolve to combat a strong yen, which is undercutting the country's efforts to engineer an economic recovery. In the final quarter of 2011, the world's third-largest economy shrank at an annualized 2.3%, which coincided with exports tumbling to their weakest level in more than 30 years.
In August, Japan set up a $100 billion facility to encourage companies to exchange yen for foreign currencies. Meanwhile, the central bank disclosed this month that it had secretly sold yen during the first week of November, in the immediate wake of its Oct. 31 yen-selling spree.
At least for one day, the news out of Japan momentarily diverted traders' attention away from Greece. Fears that the Hellenic republic may default are festering, despite parliamentary backing of austerity measures designed to secure another round of international assistance.
Meanwhile, the euro came under renewed pressure after euro-zone finance ministers scrapped a planned meeting in Brussels Wednesday that had been called to approve Greece's bailout and debt restructuring. Athens's warring political factions have failed to give European leaders clear pledges on how to implement new belt-tightening moves the country's Parliament approved on Sunday.
"After the weekend's vote, people are realizing there's more stuff to be done, and the stuff that needs to be done is being postponed," said Brian Kim, FX strategist at RBS Securities. The single currency is suffering from "a post-Greek vote hangover."
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