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Why the Japanese Yen Has Triggered Global Concern

The Japanese government was criticized for deliberately weakening the Japanese yen by German Chancellor Angela Merkel during a question-and-answer session following a speech at the World Economic Forum in Davos, Switzerland.

"I can't say I'm completely free of worry when I look at Japan right now," Merkel said, according to Bloomberg News.

Michael Meister, a senior member of Merkel's Christian Democratic Union who will be meeting with Japanese officials next month, said in a telephone interview with Bloomberg, "What can Japan's competitors do? Either we're all smart and do nothing, or we follow suit and create a spiral that hurts us all."

"The Japanese economy's real problems are structural and beg structural remedies, not tampering with the exchange rate," Meister continued.

Merkel and Meister are not the only German critics of Japanese Prime Minister Shinzo Abe's program to revive the Japanese economy through weakening the yen.

Germany's Finance Minister Wolfgang Schaeuble raised concerns about excess Japanese liquidity flooding the global capital markets while Bundesbank President Jens Weidmann warned of politicizing the Japanese yen.

Meanwhile, South Korean Finance Minister Bahk Jae Wan said South Korean exporters, which compete directly with Japanese companies in many industries, including cars, electronics and engineering, might be "at risk."

Deng Yuhan, writing for China's Xinhua News, said, "The easing of Japan's monetary policy entails the weakening of its currency, a side effect - if not the purposeful design - that can translate into an artificial and unfair price advantage for Japanese exports."

Deng continued, "It is a safe bet that others would respond with driving their own currencies down, thus igniting a downward race among the world's most heavily traded media of exchange - known in a more dreadful way as currency wars."

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Is the Japanese Yen Headed for a Long Decline?

The Japanese yen has already fallen by more than 12% against the U.S. dollar since Nov. 1, 2012 - and it could still have further to fall.

That's mainly because the Bank of Japan appears likely to go along with the wishes of the Liberal Democratic Party, led by newly elected Prime Minister Shinzo Abe, and step up its attempts to eliminate deflation by using "unlimited easing" and setting a 2% inflation target.

Most of the Japanese yen's weakness we have seen so far stems from aggressive jawboning by Prime Minister Abe and other LDP leaders. And outgoing Bank of Japan Governor Masaaki Shirakawa has appeared likely to go along with Prime Minister Abe's demands for closer cooperation between the government and the central bank.

The Bank of Japan's Monetary Policy Committee (the Japanese equivalent of the Fed's Federal Open Market Committee) is in the middle of a regularly scheduled two-day meeting. It is widely anticipated that the BOJ will agree to additional easing measures - most likely purchases of Japanese government bonds (JGBs) - and will formally adopt the government's 2% inflation target.

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Japanese Earthquake Impact: How to Play the Post-Disaster Currency Moves

According to Biriniyi Associates, investors threw more than $1 billion into Japanese exchange-traded funds (ETFs) last month - second only to U.S. energy funds and more than agriculture, large-caps and mid-cap stocks combined.

They couldn't have placed their bets at a worse time.

Amidst fears of multiple nuclear meltdowns, the benchmark Nikkei 225 Index plunged 10.55% yesterday (Tuesday) after a 6.2% decline on Monday - a two-day decline of 17% since Friday's devastating 9.0-level earthquake and tsunami. More than $650 billion in shareholder wealth has been vaporized.

As a veteran trader and longtime expert on Asia, it's a story that I've heard countless times: Japan was supposed to regain what it once had - a vibrant economy that helped lead the world in the years following World War II, and that finally achieved global dominance in the late 1980s.

Somehow, however, that never happened. But it didn't discourage the believers.

To understand how to protect yourself from the looming currency backlash, please read on...