Yen at strongest in 17 months tests Japan resolve to weaken it

[SYDNEY] Foreign-exchange traders are testing the resolve of Japanese policy makers to weaken the yen after the currency climbed to its strongest in 17 months.

The yen briefly pushed through 110 per US dollar on Tuesday to the highest since Bank of Japan governor Haruhiko Kuroda boosted monetary easing in Oct 2014, and a level that some strategists see as heightening the risk of intervention. Mr Kuroda has said he'll keep monitoring the currency and reiterated the potential for cutting interest rates further below zero. The next scheduled policy meeting is April 27-28.

"Dollar-yen's price action suggests traders don't see much threat of anything to stop the yen rally," said Sean Callow, a senior foreign-exchange strategist at Westpac Banking Corp in Sydney.

"Bold easing on April 28 is the most plausible circuit breaker for the dollar-yen rout, but it's not clear we will see that."

The yen weakened 0.2 per cent to 110.53 per US dollar as of 11:47 am in Tokyo after surging to 109.95 on Tuesday, the strongest level since Oct 31, 2014. Japan's currency was little changed at 125.73 per euro.

The yen at 110 per US dollar is "a key psychological level" that will spark nervousness about intervention to weaken it because of the damage a stronger currency inflicts on Japanese corporate profits, according to Daragh Maher, head of US currency strategy at HSBC Holdings Plc in New York.

Japan's government said in late February it didn't sell yen from Jan 28 to Feb 25, meaning it hadn't intervened in currency markets since 2011.

Other analysts discounted the threat of intervention and Prime Minister Shinzo Abe appeared to support that view in an interview with The Wall Street Journal, published Tuesday, in which he said "we must definitely avoid competitive devaluation."

Japanese officials won't engage in actual intervention, and continued jawboning would be "meaningless," said Tohru Sasaki, head of Japan markets research in Tokyo at JPMorgan Chase & Co and a former BOJ official.

"If you only shoot blanks, it just makes a sound," he said.

"At first everyone is surprised, but once they get used to it, it's just noise." Mr Sasaki sees the yen strengthening to 103 per US dollar at year-end, after accurately predicting it would appreciate at the start of 2016.

Japan's currency has surged 8.8 per cent against the US dollar this year, the best performer among its 16 major peers, as signs China's economy is slowing reverberated through the global economy and boosted demand for safer assets. A weaker yen has been a key ingredient of Mr Kuroda's efforts to boost inflation to 2 per cent through monetary stimulus. The BOJ's benchmark consumer-price index has been stuck near zero for a year.

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