Japan: Stronger Yen Testing Japanese Policymakers – MUFG
Lee Hardman, Currency Analyst at MUFG, notes that the yen has continued
to strengthen in the Asian trading resulting in USD/JPY falling below
levels which prevailed prior to the BoJ’s decision to extend QQE on the
31st October 2014.
Key Quotes
“The yen
has now increased sharply by around 15% against the US dollar since the
middle of last year and is no longer significantly undervalued.
According to our long-term valuation models, we estimate that the yen is
now more modestly undervalued by around 6% against the US dollar.
The
reversal of yen weakness has accelerated following comments earlier
this week from Japanese Prime Minister Abe stating that Japan will
refrain from arbitrary intervention and seeks to avoid competitive
currency devaluations, which have acted as a green light for yen bulls
to continue pushing the yen higher in the near-term.
The
comments have made verbal intervention in recent days from other
government officials’ sound hollow undermining their effectiveness to
dampen yen strength. Bloomberg quoted an MoF official overnight stating
that “there one sided moves in the yen market” and that “they will take
necessary action as needed” although understandably the comments have
had limited impact at restraining yen strength with the threat still
low in the near-term of direct intervention to weaken the yen. However,
the risk of direct intervention will increase if the yen continues to
strength sharply further erasing yen undervaluation which would provide a
stronger justification for action as downside risks to economic growth
and inflation intensify.
It is also increasing the likelihood
that the BoJ will ease policy more aggressively later this month which
may at least help to dampen the pace of yen strength in the near-term. A
failure to act decisively in response to building downside risks to the
outlook for economic growth and inflation in Japan would likely trigger
a further loss of investor confidence in Abenomics and reversal of yen
weakness. There is a growing sense of crisis with the Japanese equity
market having lost around a quarter of its value.”
(Market News Provided by FXstreet)