Its seems that the party hosted by yen-bears has been interrupted momentarily after yesterday's comments by Japan Economic Minister Akari Amari, assessing that Shinzo Abe's aggressive campaign to weaken the yen might well have some limits, weighting on the USD/JPY. Other Japanese officials have since warned that an oversold JPY risks damaging certain sectors of the Japanese economy.
… The hand that rocks the yen?
Undoubtedly, politics became the major driver behind the Japanese yen weakness since mid November, when investors needed ¥79.20 to buy $100 in contrast with ¥87.90/88.00 today.
Nonetheless, one the main barriers Japanese policy-makers face is represented by the high ineffectiveness of former measures with the same objective, that is, quelling the deflation that has been punishing the country for the last two decades. The other relevant obstacle is the lack of credibility by the FX community. Regardless of how big a package of stimulus could be, or how many trillions of yens would be pumped into the economy, everything could be in vain if investors do not realize that this time the Government and the BoJ are together, joining forces in order to wake up some inflation expectations, and lure the citizens to reactivate the frozen demand for credit.
Apart from the late backdrop of increasing risk aversion, market participants would be well placed to fully anticipate a change in the inflation target to 2.0%, doubling the current 1.0%, in the next BoJ monetary policy meeting on January 21st -22nd. This, combined with the next fiscal challenges facing the U.S. economy and a repatriation of JPY due to the end of the fiscal year in Japan would be no small issue for yen bears over the upcoming weeks, supposing they want to keep the weakness going to key resistance levels located at 90.00, 95.00 and 100.00 against the greenback.
In addition, Currency Analyst at BTMU, Lee Hardman, comments that " … the price action is more a reflection of crowded short yen positioning which had made a yen correction higher after largely interrupted heavy selling since July 2012 long overdue. It is also a reflection that yen overvaluation is closer to being almost fully unwound according to our long-term models with further downside potential likely to require a fresh catalyst … ".
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.