While there are quite possibly traces of the former at work, critical opinion points to the latter as the rate at which China increases its forex holdings declines and China, in trying to position itself as the new global economic superpower, allows the yuan to free float in the market. Moreover, China’s economic growth has slowed this year to 6.1%, which is the slowest growth rate on record in 10 years.

In spite of the grim news and the expectation that Japan’s economy will remain troubled in the short-term, the yen has continued to appreciate in forex trading. Around the same time as the BOJ announcement, the Fed’s announcement that it would take further steps to buy long-term treasuries and extend the size of lending programs caused the yen to post big gains against the USD, falling below the key 96.00 level. Since the global financial crisis became top priority last fall, the USD/JPY has almost become a guaranteed profitable short forex trade as the yen has appreciated due to investors unwinding their carry trades and its perceived safe-haven status.

Like most other major economies, China has been battling high unemployment, flagging exports, and a slowed housing market, although it is one of only three large economies still growing. The stimulus, however, which has increased spending on roads, railways, housing, and loans, has acted as further riprap to shore up the Chinese economy. Lu Ting, a Merrill Lynch economist in Hong Kong, told Bloomberg, “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008.”

Lu added that China has the resources that it needs to maintain growth even if the rest of the world takes longer to show the same signs of recovery. The country’s low public debt of only 18.5% of its GDP, $1.95 trillion in forex reserves, and balanced budget put it in a good position to weather the storm. Although the Chinese government recently faced criticism from Treasury Secretary Geithner over perceived manipulation of the yuan in currency trading, Lu maintained, “China has perhaps the deepest pockets in the world. It can relentlessly ramp up spending to create jobs and meet its growth target.”

Although Japan’s forex reserves topped the one-trillion mark in late November, the government may have been reluctant to shore up the yen due to deteriorating global economic conditions which caused Japanese exports to fall 35% in December and deflated earnings back home. Toyota, Sony, and Honda have all announced cutbacks and layoffs as well.

Japan’s Finance Minister, Shoichi Nakagawa, said that authorities should be prepared to deal with undesirable market volatility if needed. In late January 2009, Japan’s Vice Finance Minister for International Affairs Naoyuki Shinohara told reporters, “We are closely monitoring movements in the currency market” but declined to comment when asked if Japan would curb the yen in the future.  The government’s laissez-faire approach was reinforced when the Bank of Japan recently voted to keep the benchmark rate at 0.1%. 

The stimulus plan is not the only measure being used to help the economy. In late November, the People’s Bank of China made a 108-basis-point cut to interest rates. Although the rate cut was expected by investors, the magnitude of the slashing—the largest since the Asian financial crisis of October 1997—caught most by surprise. However, it did help the yuan post a modest gain against the U.S. dollar in forex trading, as did further cuts in December. Most analysts anticipate the yuan floating between 6.80 and 6.90 against the dollar, though if export production suffers in the near future, it could weaken further. 

A currency strategist told The Economic Times that the currencies most likely to be hurt in coming months include the Singapore dollar, Taiwan dollar, Malaysian ringgit, and Thai baht, with these falling as much as 4% against the U.S. dollar by June 2009. The worst may have passed in currency trading for the hard-hit South Korean won and Indian rupee, but they remain vulnerable for now.

According to the Ministry of Strategy and Finance, 11 billion of the stimulus will be allocated to new spending, including infrastructure-related projects, small business assistance, local government spending, and low-income household assistance. The government also plans about three trillion won in tax cuts and other incentives.

Thus far, however, the stimulus, along with a series of interest rate cuts, has been unable to stop the won’s losses in online trading. To date, the won has fallen 32.7%, making it one of the world’s worst performing currencies, according to the Associated Press.

Included in the stimulus package’s provisions are extended credits for small businesses and cash paybacks to Japanese households. Although the Japanese economy is thought to be relatively stable in comparison to the U.S. and Europe, concerns about the nation’s health still linger. Industrial output has fallen for the third straight quarter, and the high yen value has proved detrimental for Japanese exporters, whose products have become too expensive for key importers in the U.S.

As the yen has appreciated in forex trade, the Nikkei has remained low, down 32% in 2008 and 24% in October alone. This is a combination which points to the tremulous condition of the financial market. “Foreign exchange markets remain very jittery. Once again, the strongest performers in the last 24 hours have been the dollar, Swiss franc and most of all, the yen,” ING forex strategist Tom Levinson told Reuters. “So it’s still very much a case of safe-haven, low-yielding currencies performing more strongly.”