Fundamental Comment

For how long will the BOJ tolerate the yen’s strength?

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The Japanese yen continued to strengthen versus the U.S. dollar on Friday, hitting a 15-month high, raising questions whether the Bank of Japan would intervene in the forex market to adjust the yen’s exchange rate.

The USDJPY pair slipped to low of 105.54, the lowest level since November 2016, set for a sharp weekly loss of nearly 3 percent.

While some analysts could claim that the strength of the yen is due to worries in the market, others could play down this analysis by the significant recovery in global stocks.

The reappointment of BOJ Governor Haruhiko Kuroda had little impact on the yen despite his bias to hold the ultra-loose monetary policy.

The dollar index, which tracks the green currencies movements versus a basket of major currencies, plunged to the lowest level since December 2014 on Friday, set for its biggest weekly drop in two years.

Hence, large contribution of the yen’s advance could be attributed to the dollar’s weakness, as it trades near record lows versus other major currencies.

There has been mounting doubts that President Donald Trump’s package policies depend on a weak dollar and thereby Washington would continue to pressure the dollar to keep it low.

Investors have been focusing on twin deficit in the world’s biggest economy, the budget deficit and the current account gap, especially the fiscal shortfall that is predicted to reach $1 trillion in 2019 due to the huge spending and tax cut plans.

However, as known that to the BOJ has a certain limit to the yen’s exchange rate, where after that limit the central bank would not hesitate to intervene.

The exchange-rate stability is important to officials who “will take appropriate action at the appropriate time, if needed,” Japanese Prime Minister Taro Aso said today.

This mean that at a certain level there would a conflict in interest between Washington and Tokyo regarding the exchange rate, which could trigger a currency war.

The FX market has started this year on a very high volatility that is still unknown for how long it would continue.

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