With USD/JPY back below the critical 80 level once again, it is no surprise that Japanese finance officials are expressing increased concern, especially at a time when the economy is attempting to recover from the aftermath of the tragic March earthquake and tsunami. USD/JPY has been creeping lower progressively since the end of May. In the last two months, USD/JPY has fallen by almost 7%.
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Part of the explanation for the yen’s recent strength is the latest episode of risk-flight, triggered by increased concern over the pace of the US recovery and worries over Europe’s deepening debt crisis. The dollar’s renewed weakness was not helped overnight when the Fed Chairman seemed to rule out any additional quantitative easing as a response to the recent phase of slower growth. Contributing to the continued resilience of the Japanese yen over recent months is the consistent buying by Asian sovereign wealth funds, especially China. In April, China purchased another USD 16.6bln of JGBs, a record monthly haul. This powerful source of yen-buying is unlikely to go away any time soon, as these sovereign wealth funds remain extremely motivated to diversify out of the declining dollar.
For the MOF, currency strength is the last thing the economy needs at this time. Kan’s government is losing political traction at a time when there is consternation over how long it has taken to calibrate a proper fiscal response to the massive restructuring requirement post the March events. The IMF has also weighed into the policy debate by criticising the BOJ for failing to offer sufficient support for the ailing recovery. It is too early to be too worried about imminent intervention from the MOF. That said it is very likely that local finance officials will start voicing their concerns about currency strength much more audibly should the yen continue to strengthen.
Michael Derks, Chief Strategist
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