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Yen weakness accelerates

27 February 2012  •  Source: Michael Derks, FxPro

February is turning into the worst month for the Japanese currency for a very long time. At the start of February, USD/JPY was close a record low just above 76. Since then, yen selling has been constant, with USD/JPY reaching a high of 81.67 overnight, a rise of 7%. Tokyo will be delighted.

On many levels, the decline in the yen is not a surprise. The crippling loss of production which resulted from last year’s earthquake/tsunami, an overvalued currency which is weighing heavily on the competitiveness of exports and higher energy prices have all contributed to a significant decline in Japan’s trade fundamentals. Japan has recorded a trade deficit in each of the past nine months.

Also hurting the currency is the BoJ’s decision earlier this month to lift their asset purchases-program by a further JPY 10trln, as well as the announcement of an explicit inflation target. Traders have been scrambling to reduce significant long yen positions, amplifying the recent currency weakness. In addition, buoyant equity markets have aided demand for risk assets and resulted in a partial reversal of some of the safe-haven demand which had given the Japanese currency such a lift over the last couple of years. And in the United States traders are less convinced that the Fed will actually implement additional quantitative easing given the firmer economic data witnessed over the last few months.

It is certainly the case that a 6% shift in USD/JPY in one month is a very significant move. At the same time it should be remembered that Japan is by far the world’s largest creditor, a position made possible by massive sustained current account surpluses over the past quarter century.

Although the MoF will be delighted with developments this month, they will certainly have recognised that it is too soon to celebrate. If Europe falls over again the yen will again be regarded as a safe port in the storm.