Yen Falls To The Lowest Since April 2011 As Abe Goes ‘Activist’

The Japanese Yen declined Wednesday to a 20-month low against the US Dollar amid speculations that the newly appointed prime minister, Shinzo Abe, would take drastic stimulus steps to pull the economy out of deflation. Abe is eager to push the Bank of Japan (BoJ) to increase cash infusions into the economy.

Yen Falls To The Lowest Since April 2011 As Abe Goes 'Activist'

The Japanese currency fell against all its major peers after a board member of Bank of Japan suggested, during the November meeting, to conduct open-ended asset purchases. The U.K. and Australian markets were closed yesterday. But the Korean Won surged to 15 month highs as foreign investors bought local shares. The democratic and republican members will return tomorrow for negotiations over the possible fiscal cliff.

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Shinzo Abe wants the Bank of Japan to set a 2 percent inflation target to fight the deeply-rooted deflation. The Bank of Japan’s 76 trillion-yen ($890 billion) monetary easing program is set to expire at the end of this year. Under the program, BoJ bought securities ranging from stock funds to government bonds. Abe, who returned to the prime minister’s office after leaving it in 2007, called for aggressive monetary easing to spur growth and inflation.

The Yen fell 0.7 percent to 85.39 per Dollar on trading platform EBS Wednesday. It was trading at 112.94 per euro, the weakest level since August 2011. The currency is down 13 percent this year, the biggest loser among 10 developed country currencies. The U.S. Dollar is second biggest loser with 2.8 percent slide, while Euro is the third-worst performer with 0.7 percent loss.

With a weaker Yen, there are hopes of Japanese companies reporting better earnings and a strong Nikkei. Nikkei is up more than 18 percent since mid-November, when prime ministerial elections took place. However,  the Yen declined about 8 percent in the same period against Dollar.

Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) said in a research report that Overseas yields and stocks look unlikely to become risky, given the increasing uncertainty about the US fiscal cliff. In addition, investors feel confident to buy, as yields in the medium-term sector are not rising thanks to the BoJ’s continued large purchases of short- and mid-term government bonds.

Heightened pressure for aggressive easing, such as Liberal Democratic Party leader Shinzo Abe indicating that he would consider revising the BoJ Law if the Bank did not introduce inflation targeting at its next policy meeting, appears to be a two edged sword. Aggressive easing by the BoJ stabilizes short-term yields, but the superlong and long-term sectors could be destabilized if the BoJ takes unconventional easing measures, such as purchasing foreign bonds to achieve an inflation target. The current depreciation of the Yen and fall in stocks likely anticipates a more reckless BoJ.