The Japanese yen rose sharply on the last Friday after the earthquake hit the country, spurring risk aversion and demand for the currency as a safe haven. Today the currency slipped as the government and the central bank attempt to deal with the results of the disaster. Can the Japanese currency still profit from the fears, caused by the tremor, or it’s going to extend its losses?

The earthquake and the subsequent explosion at Fukushima nuclear plant added to the uncertainty, caused by the tensions in North Africa and Middle East. The Bank of Japan unleashed the massive amount of liquidity on markets, pledging ¥21trillion (¥15 billion today and another ¥6 billion tomorrow) to support financial institutions and doubling its asset purchase program to ¥10 trillion.

On the other hand, the question about the impact of the disaster on Japan’s economy arises. Mostly affected Northern Tohoku region, which constitutes 8% of the total Japan’s GDP, will require large efforts and a long time to recuperate from the disaster. IBTimesFX points out that Japan’s economy already wasn’t healthy and the current problems haven’t improved it at all. Such outlook is bearish for the yen. The words of Finance Minister Yoshihiko Noda, who said that “it is time to closely watch” the currency and suggested about a possible intervention, were also negative for the yen.

Saying all that, we should remember that the efforts of Japan to recover from the catastrophe spur business activity and draw fund inflows from overseas. DailyFX argues that the yen may advance if investors would think it would be profitable to invest in the nation’s recovery and reminds that the USD/JPY fell to the record low after the 1995 earthquake outside of Kobe, Japan.

It’s unclear for now in which way the sentiment will turn. Anyway, its influence will be felt in the longer term. In the near future the rates decision of Japan’s central bank is more important. The BoJ has cut short its planned two-day policy review to one day, so the decision about the interest rate was made today instead of tomorrow. And this decision was bearish for the yen as the bank’s policy makers decided in a unanimous vote to keep the overnight call rate at around zero to 0.1 percent.

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