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No doubt policy officials in Tokyo will be very pleased with the weakness of the currency so far in February. USD/JPY started out this month threatening to break down below the 76 level. There was much gnashing of teeth and threats of mass intervention from government ministers, a realistic prospect given the huge war-chest the BoJ has at its disposal. However, since then the yen has weakened consistently, and is now above 79.
Two factors help to account for the turnaround. Firstly, risk appetite has continued to improve this month; last night for instance, US equities reached a four-year high. As a result, some of those traders and investors who parked money in the Japanese currency as a safe port during Europe’s financial storm have gradually put their capital to work in growth assets and currencies. Witness the continuing surge in AUD/JPY, which since the start of 2012 is up almost 10%!
Secondly, the BoJ’s surprise decision to lift asset purchases by JPY 10trln and to announce an explicit inflation target of 1% underlines their determination to support the economy. The latter had clearly been underestimated by the forex market.
How the Japanese yen performs next month once the end of Japan’s financial year approaches is another matter, as this invariably corresponds with a good deal of repatriation by large Japanese companies. Even so, both the BoJ and the MoF will be encouraged by what they have seen in the last couple of weeks.
