Turning Japanese

Japan's central bank just got into the currency market overnight, buying dollars to stem the massive inflow into the Japanese Yen.

Fresh after victory in a party leadership contest, Japan's Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting yen strength, which has weighed on stock prices and corporate profits. 

Even as the U.S. dollar surged as much as 3 percent on the day against the yen, doubts lingered about the ultimate effectiveness of Japan's unilateral yen selling spree. A 15-month solo effort by Switzerland to weaken its currency did little to tame the Swiss franc.

In addition, Japan is trying to put a halt to yen strength while other major central banks such as the Federal Reserve may be considering additional steps to ease policy that could weigh on their respective currencies.

"It is far less clear that intervention will be effective in a world of zero interest rates and excess liquidity, but we think that it still makes sense for Japan to take action to try to arrest yen strength," Richard Jerram, chief Asia economist at Macquarie Securities in Tokyo, said.

All bets are now off this week.  What will the Fed do to keep up?  What will the European Central Bank do to keep up with the Fed?  The carousel is spinning around faster and faster now, and when it breaks down, all hell will break loose.