Japanese Finance Minister Jun Azumi has formed a habit of warning currency markets about the strength in the Japanese yen (FXY). For example, on May 31st, with USD/JPY slightly above 78 and at 3 1/2 month lows, Bloomberg reported the following warning from Azumi:
We will continue to carefully monitor currency market moves with more caution…If these excessive moves continue, I think I must take decisive action…It's obvious that the recent one-sided moves don't reflect the fundamentals of the Japanese economy.
The Japanese yen hit a bottom against the U.S. dollar the next day. Unfortunately for Azumi, just six weeks later these levels are getting retested. Surely, his resolve to intervene will now get tested as well.
If the U.S. dollar breaks recent lows versus the yen, it could quickly retest historic lows without intervention
Almost on cue, Azumi issued another warning about the yen's strength last Tuesday, July 17th: "We will continue to watch the markets with a sense of caution and will take decisive action if needed." Azumi blamed speculators for the yen's strength. However, this time, almost a week later, the yen has continued to gain against all major currencies.
Moreover, it is not so easy to claim that the yen is gaining from safe-haven buying. When Azumi issued his warning at the end of May, the S&P 500 (SPY) was a day away from a massive 2.5% one-day sell-off which finally carved out a bottom for the index. As a traditional "risk-off" play, the yen's strength seemed consistent with the worldwide sell-off in stock markets and renewed angst about Europe's sovereign debt crisis. This time around, the S&P 500 is in the middle of a slow, grinding recovery back toward 52-week and multi-year highs. (Of course, one could argue that S&P 500 itself is performing as some kind of safe-haven as funds flow out of euro-denominated stocks and into dollar-denominated ones.) Moreover, the Australian dollar (FXA) has recently benefited from the "risk-on" carry trade as some segment of the financial markets chase yields. The Australian dollar gained over 10% on the yen in just one month from the June 1st low.
While the yen has gained on the U.S. dollar, the Australian dollar has gained on the yen
The Australian dollar's rise against the yen has stalled out for much of this month. Perhaps the resumption of a downtrend in this currency pair could signal an imminent move to intervene on behalf of the yen.
Regardless, I think it is time to watch out for yen intervention even if the Japanese financial authorities must by now be pretty dismayed and discouraged by the utter lack of sustained success from previous interventions. Even the "new era" of dollar strength and yen weakness lasted less than two months. I believe it was sparked by America's apparently growing energy independence along with aggressive inflation-targeting from the Bank of Japan. These catalysts are now long forgotten and Azumi may need to fall back on jawboning the markets and then real intervention.
All things considered, I do not expect the yen to spend much time below 78 with the USD/JPY pair. I am now accumulating a small position in USD/JPY in anticipation of a bounce recognizing that the on-going, if small, possibility of QE3 from the Federal Reserve serves as a major wildcard. The intervention in September, 2010 came after the Federal Reserve telegraphed QE2 but before the Fed officially began its implementation. I further focused my positioning against the yen and against the Australian dollar by selling my long AUD/JPY last week.
Disclosure: In forex, I am net short the Japanese yen and the Australian dollar.