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The Yen is the third most-traded currency in the foreign exchange market after the US Dollar and the Euro. Due to repressively low interest rates available to savers, the Yen no longer holds reserve currency status. On the contrary, the low interest rates on the Yen have created what is known as the Yen carry trade.
The Yen carry trade basically involves borrowing Yen at a low interest rate and selling the Yen for a high yielding foreign currency, the most popular of which have been the New Zealand Dollar, Aussie Dollar, Taiwan Dollar, Canadian Dollar, Euro and the British Pound. The money is often then invested in the stock markets of those countries rather than left in the bank.
Whilst Japanese interest rates are expected to remain low, the Yen will remain under pressure to depreciate further. However, the Yen is a very volatile currency and can produce sudden exchange moves which wipe out all gains made by the carry trade. Thus, timing is everything.
If the Yen carry trade were to be fully unwound, it is estimated that as much as 40% (or more) could be wiped off the values of stock prices in those countries and the Yen could double in foreign exchange terms.
The Bank of Japan (BoJ) is the central bank of Japan, located in Tokyo. The BoJ has a 9 member Monetary Policy Board for implementing monetary policy. The BoJ is not independent and its decision making is heavily influenced by political intent. This lack of independence has resulted in artificially low interest rates for decades and helped inflate the asset price bubble of the 1980's and early 1990's for which the Japanese paid heavily when the bubble burst.
