If recent remarks by Japanese officials including the head of the central bank were aimed at capping the yen’s plunge to a 13-year low, they appear to be working.
The yen is set for its biggest weekly climb in five months versus the dollar after Bank of Japan Governor Haruhiko Kuroda said Wednesday the currency was already “very” weak relative to those of its main trading partners. That followed comments by another central bank policy board member along with former finance ministry officials that the yen may have fallen enough as it reached 125.86 on June 5, the lowest since 2002.
While a depreciating yen may push inflation toward the central bank’s 2 percent target by increasing profits at Japan’s biggest exporters, it hurts smaller companies dependent on imported energy and raw materials. Bankruptcies related to the weak currency rose for a 17th month in May.
“The market took what Kuroda said as an attempt to stop the yen from weakening further,” said Yuji Saito, director of foreign exchange in Tokyo at Credit Agricole SA. “The 125 yen-per-dollar level has become a focal point for investors.”
The yen traded at 123.66 per dollar as of 8:36 a.m. in London on Friday, rising 1.6 percent this week. It has dropped about 30 percent since Prime Minister Shinzo Abe took office in late 2012.
Expectations for yen swings against the dollar have also fallen, with three-month implied volatility sliding to a 2 1/2-week low of 8.4 percentage points.
“The market maybe will start to price in a Japanese government preference for the range of 120 to 125,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work at the central bank. “The BOJ is not necessarily inclined to weaken the currency more, but it will need to stop any significant appreciation of the currency.”
Economy Minister Akira Amari on the evening of June 10 said Kuroda didn’t intend to move markets with his comments at the Diet, and his remarks might have been distorted. That suggests the Abe administration wasn’t happy with the yen’s response to Kuroda, wrote Masaaki Kanno, JPMorgan Chase & Co.’s chief Japan economist.
Kuroda had focused his remarks on a trade-weighted, inflation-protected measure of the currency, telling lawmakers “the yen is unlikely to weaken further in real effective terms” given “how far it has come.”
Analysts predict the yen will finish the year little changed at 125 per dollar, according to the median estimate in a Bloomberg survey.
Yutaka Harada, a Kuroda ally who joined the central bank’s policy board in March, said in an interview last week that “the abnormally strong yen has been corrected.” Former vice finance minister Eisuke Sakakibara said this month the BOJ’s tolerance for a weak yen is wearing thin, while another former vice finance minister, Hiroshi Watanabe, said the currency is near the edge of a “tolerable range.”
“It’s a fact that investors are extremely wary about the potential for attempts at verbal intervention,” said Kyosuke Suzuki, head of foreign exchange and money market sales at Societe Generale SA in Tokyo. “The 125 yen-per-dollar level seems to be the line in the sand.”