Adopting what has become conventional language whenever Tokyo becomes concerned over excessive currency strength, Finance Minister Azumi last night claimed he was ready to “take decisive action if needed”. In response, the yen lost some of its bid tone against the dollar and there was some decent profit-taking on the crosses with both EUR/JPY and AUD/JPY up by around 1% from yesterday afternoon. Clearly, the MoF is becoming impatient with the yen’s continuing strength – in the past four months the real trade-weighted index for the yen has risen by almost 10%.
Azumi’s claim that much of the recent move was somehow “speculative” is misplaced. Firstly, Japan remains the world’s largest net creditor and as such continues to attract safe-haven flows whenever risk appetite swoons. Secondly, many sovereign wealth funds, institutional investors and high net worth investors continue to diversify out of the euro, allocating currency exposure to other majors such as the dollar, the pound and the Aussie as well as the yen. Thirdly, the Japanese economy seems to be dealing with the high exchange rate relatively well.
Short of spending some of that massive intervention war-chest, the MoF will probably need to get used to a further gradual strengthening of the yen in the near term.