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Forex Flash: Yen selling resumes following G20 meeting - BTMU

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen has continued to weaken following last week´s G7 & G20 meetings passing with displaying significant international concern over the yen’s recent sharp decline which is encouraging renewed yen selling in the near-term.

he notes that the final G20 statement released over the weekend reiterated their “commitments to move more rapidly towards more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments”. They also committed to “refrain from competitive devaluation” as they “will not target our exchange rates for competitive purposes” and “will resist all forms of protectionism to keep markets open”.

Hardman feels that the comments are clearly designed to ease investor concerns over the risk of a currency war escalating which could increasingly negatively impact global trade and growth. He notes that the G20 communiqué like the G7 statement did not refer specifically to the yen, although it did acknowledge the important policy actions taken by the Japanese authorities which have served to reduce downside risks to global growth.

He sees that this will be interpreted by investors as international approval for the new government´s print and spend policies, intended to defeat deflation and boost growth in Japan. he writes, “The overall message to the Japanese authorities from both the G7 statement and G20 communiqué is that the international community will tolerate a weaker yen if it results indirectly from looser and expectations of looser BoJ monetary easing ahead using domestic instruments.

However, that being said, he comments that the international community will no longer tolerate direct attempts by the Japanese authorities to directly talk down the yen and will likely oppose any attempts in the future to purchase foreign assets to directly weaken the yen. However, he feels that judging by comments from Japanese Prime Minister Abe overnight, he does not appear at least on the surface to be overly concerned by the threat of international opposition stating that buying foreign bonds and measures to directly affect the level of the stock market could be utilised in the future by the BoJ to meet its new 2.0% inflation target

Most likely, Hardman suspects that Abe he is trying to keep yen weakening expectations of foreign bond purchases alive knowing too well they will be much harder to implement in reality. His comments also serve to reinforce investor concerns that the BoJ’s political independence is still being undermined, weakening the yen. He feels that future yen direction will continue to be driven by domestic monetary policy from the BoJ and improving international investor confidence which are both driving the yen weaker. However, with initial correction phase for yen overvaluation now almost complete it is likely that the pace of any further yen weakness will prove more gradual. He finishes by writing. “The G7 and G20 statements should also help to ease the rapid pace of yen weakness in the near-term.”

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