Can Japan and Switzerland Rein in the Yen and Franc?

In an effort rein in the appreciating currency, Japan sold one trillion yen ($12.5 billion) (NYSE:FXY) Thursday, driving the yen to a three-week low of 80.20 per dollar from 77.10 per dollar. The rising value of the yen against a host of other currencies threatened to derail the country’s economic recovery efforts as it tries to pull itself out of a recession wrought by the March 11 earthquake.

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As the global economy deteriorates, investors have been looking for safe-havens like gold (NYSE:GLD) and more insulated currencies like the Swiss franc (NYSE:FXF) and the yen, pushing them to new highs against the once-safe U.S. dollar (NYSE:UUP) and many other currencies. So in an attempt to ease the yen’s appreciation, the finance ministry sold yen while the Bank of Japan increased its funds for buying financial assets from 10 trillion yen to 15 trillion yen.

However, while Japan’s easing policy might have the immediate effect of devaluing the yen (NYSE:FXY), Takashi Kamiya, chief economist at T&D Asset Management, says “The yen’s advance reflects the difficult economic and fiscal situation of both the U.S. and the euro zone, so even if Japan intervenes in the market, it won’t be able to combat the yen’s rise in the long run on its own.”

Japan’s move to cut currency comes only a day after the Swiss central bank cut interest rates in an effort to weaken the franc (NYSE:FXF). The move pressured Japan to do its own monetary easing because it would only push up the yen still higher if it did not. However, Japan’s and France’s monetary easing could put pressure on the European Central Bank, meeting Thursday to review policy, to resume buying bonds, as the sovereign debt crisis in the euro zone has been largely responsible for the rising value of the franc and yen.

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