Currency markets have been in focus throughout 2010, first as extreme weakness in much of Europe has helped to send the euro sharply lower against most major currencies. More recently, the U.S. dollar has been the subject of much debate as weak job growth and sagging consumer confidence has led many to believe that the Fed will act to implement further easing measures this year. Thanks to this weakness, many investors have piled into the yen, driving the value of the currency to one of its highest levels in more than a decade, and pushing ten-year Japanese government bonds down to an unbelievable 1%.

Currently one dollar buys about 85 yen, close to its all-time low of just under 80 yen (that mark was set roughly 15 years ago). "The yen typically strengthens in times of financial turmoil as Japan's trade surplus makes the currency attractive, because it means the nation doesn't have to rely on overseas lenders," writes Stephen Morris for BusinessWeek. However, this isn't exactly great news for Japan's exporters, which fuel the country's struggling economy. A stronger yen makes products less competitive in foreign locales and can often eat into corporate profits. "Japan's companies would be able to get through a period with the yen at 90, or the late 80s," said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. "But when it goes down to the early 80s, their profit assumptions will start to look different."

This has put Japan in an interesting position; it has one of the highest debt/GDP ratios in the world -- meaning that more debt will be hard to pile on -- but at the same time, the currency is getting too strong for its own good and needs to be moderated in order to promote continued growth in exports. Perhaps fortunately for Japanese policy makers, they can wait until after the Fed's meeting later today in order to decide on their program to possibly inject more money into the system [also see Do You Need A Hedged Equity ETF?].

Many analysts believe that the Federal Reserve will announce -- or at least hint at -- a new program to help boost the sagging U.S. economy. For Japan, the size and scope of the American program is the real key for their next moves; a massive influx of cash from Bernanke and Co. is likely to drive the value of the dollar even lower against the yen. "The dollar is highly likely to fall below 85 yen, possibly dropping beyond 84 yen if the Fed mentions a concrete plan to help the economy," said Masafumi Yamamoto, chief FX strategist at Barclays Capital. Should this happen, it may very well force Japanese policy makers to intervene on a large scale in order to prevent the currency from appreciating to its highest level ever against the dollar, a development that could potentially cripple exporters and crush hopes of the country coming out of its economic malaise [see Japanese Yen ETF Investing 101].

Due to the yen's rapid rise and today's policy meetings, look for the Rydex CurrencyShares Japanese Yen Trust (NYSE: FXY) to remain in focus for much of today's trading. The fund is linked to the U.S. dollar/Japanese yen currency pair, which is currently the second-most-traded currency pair in the world (it accounts for roughly 14% of global forex transactions). The fund charges an expense ratio of 0.4% and has been surging higher over the past few weeks as Western developed markets have experienced significant weakness. FXY is up 13.1% over the past 52 weeks and 6.3% over the past three months [also read Three Reasons Why Japanese Yen ETFs Are Headed For A Crash].

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