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Forex Flash: Yen sell off extends as concerns over US opposition ease – BTMU

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen has weakened further overnight with USD/JPY rising towards a new high within the recent sharp weakening trend just below 94.50.

He sees that Yen selling momentum was reinforced following comments from Lael Brainard overnight, the US Treasury Department’s under secretary for international affairs, which have helped ease market participants heightened concerns regarding US opposition to further yen weakness ahead of this week’s G20 meeting.

He writes, “Ms Brainard stated that she supports the effort in Japan to end deflation and reinvigorate growth. The comments have acted as a green light for speculators to resume selling yen. Ms Brainard also warned G20 members to support their commitment to move to market-determined exchange rates and refrain from competitive devaluation in “words as well as deeds”.

Hardman continues to note that it was also speculated yesterday that G7 officials are considering releasing a statement ahead of this week’s G20 meeting in an attempt to dampen building investor concerns over the threat posed to global growth from an escalating global currency war. He notes that it has been reported that the current wording of the proposed statement combines traditional backing for market-set exchange rates with a new line that governments “don’t direct fiscal or monetary policy at driving currencies”.

He feels that it is likely this new line that Japanese officials have reportedly questioned given that it indirectly points to increasing international concern over further yen weakness ahead should it result from the BoJ’s ongoing shift to more aggressive monetary policy easing. It also does not appear consistent with the Japanese officials’ ongoing attempts to talk down the yen through linking it to BoJ monetary easing. He writes. “With the yen’s overvaluation almost fully reversed according to our valuation model’s, further yen weakness which drives the currency deeper into undervalued territory is naturally more likely to draw international criticism ahead as Japan’s main trading partners lose competitiveness.

Hardman finishes by writing, “However, for now we do not anticipate that this week’s developments will highlight material international concern over the current scale of yen weakness. The yen is likely to remain under downward pressure ahead of the government’s nomination of a new governor and deputy governors at the BoJ who are expected to mark a shift to more aggressive easing. Japan Economy Minister Amari reiterated overnight Prime Minister Abe has not yet decided upon the BoJ governor candidate although named ADB Chairman Kuroda as one of qualified people. Kuroda stated yesterday that he prefers implementing more stimulus in 2013.”

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