The Japanese yen fell further to 89.67 against the dollar, its lowest since June 2010, on Monday, after reports that Japanese policymakers are working to further loosen the monetary policy to boost the economy. The possibility of monetary policy easing has been the key driver of the yen's decline in last few months.
The newly appointed prime minister Abe's aggressive policy expansion plans have led to 11 percent decline in the yen, since his Liberal Democratic Party won the general elections in December. The depreciation in yen is good for the Japanese economy, as companies can export more goods and services.
In December 2012, the Bank of Japan raised the limit for asset purchase program by $120 billion (10 trillion yen) to 101 trillion yen ($1210 billion). Prime minister Abe is putting pressure on the central bank to announce stimulus measures and bring the economy out of deflation. The government said it will take every possible step to achieve 2 percent inflation. The Japanese economy is marred by over 20 years of negative growth and deflation.
Manufacturing activity in the country shrank to 44-month low in December. According to Markit/JMMA, Japan's Purchasing Manager's Index (PMI) declined to 45 in December from 46.5 in November. The data released by Cabinet Office shows that Japan's economy shrank by 0.9 percent in September quarter, compared to 0.1 percent rise in the previous three months.
Market players think that, apart from the current stimulus measures, the government needs to take more steps from revive the growth momentum. Japanese shares surged after decline in the yen. When the market opened after three days weekend holiday, Nikkei Average went up 0.7 percent, the highest level since April 2010.
After urging the government for months to lower the yen, some Japanese business owners have warned that the fall in yen could go beyond the control if the currency loses value for wrong reasons and too fast. A sharp decline in yen can also expose the country to soaring fuel prices that will negatively affect the economy. Japan's fuel imports have increased significantly after the 2011 earthquake and tsunami, widening the trade deficit.
Many Japanese firms expect the yen to go as low as 100 or more per dollar. For example, Toyota Motor Corporation (NYSE:TM) (TYO:7203) said that one-yen of decline in the exchange rate over a full year can boost its annual operating profit by $397 million (35 billion yen). In the same scenario, Nissan Motor Co., Ltd. (PINK:NSANY) (TYO:7201)'s profits will go up by 20 billion yen, and Honda Motor Co Ltd (NYSE:HMC) (TYO:7267)'s by 16 billion yen. Despite the positive outcomes of a weaker yen, economists have warned that Japan must control its finances to win the investors' confidence. If investors lose confidence, Japan's huge debts could lead it to a Greece-style financial crisis, sending the yen into free fall. Japan has the world's largest public debt, more than double the size of its economy. A Weak yen would help exports, but it can also undermine the economy by pushing the costs of imports to stressful levels.
Other analysts fear that a weak economy can prompt the government to put the sales tax increase on hold. Increase in the sales tax is something Japan watchers and credit rating agencies call necessary for Japan's fiscal stability. So, any stimulus measure shouldn't cause the postponement of the sales tax increase.
Investors and analysts, including Jeffrey Gundlach, are shorting Japanese yen, while going long on the Nikkei because a weaker yen will boost exports.
The Bank of America Merrill Lynch said in a research report that large speculators partially covered the yen futures by about 9 percent last week, from $11.6 billion to $10.6 billion. The currency could further weaken to 93.