The yen unexpectedly reversed the dollar’s strong rally against the Japanese currency after surprise comments by the Bank of Japan Governor, Haruhiko Kuroda caught markets off-guard. The dollar has been surging higher against the yen since late May, making gains of over 5% to a 13-year high of 125.85. But in a speech at the Japanese parliament’s lower house financial affairs committee, Kuroda said that the yen’s real effective exchange rate is “very weak” and further falls were unlikely. The real effective exchange rate is defined as the price adjusted trade-weighted value of the yen against other currencies.
Strong payrolls data last Friday had boosted the dollar to above the 125 yen level for the first time in 13 years and while Japanese exporters have benefited from a weaker yen, the trade-weighted value of the yen has fallen to its lowest level since 1973. The steep fall is likely to have raised some concerns with Japanese officials who are not thought to be comfortable when the yen falls too fast.
Wednesday’s jump of around 1.5% against the dollar to 122.50 goes some way of correcting the yen’s excessive fall in recent weeks. The yen’s decline since the middle of 2014 was largely triggered by the BoJ’s expansion of its quantitative easing program as well as negative growth in the second and third quarters of 2014. But recent indicators have pointed to a solid recovery of the Japanese economy after first quarter growth for 2015 was revised up to 3.9% on an annualised basis, from initial estimates of 2.4%. April core machinery orders and industrial production figures also came in above estimates, suggesting that the growth momentum is extending through to the second quarter.
Kuroda once again stressed in his speech that it is desirable for the yen’s exchange rate movements to reflect economic fundamentals, although he declined to comment on whether current exchange rates reflect this. The Governor also said that he expects inflation to meet the BoJ’s 2% target in the first half of fiscal year 2016 and for quantitative easing to continue until the inflation rate has reached the target.
It is unclear if Kuroda’s remarks will be enough to push the yen to a longer-term recovery against the dollar, given that BoJ board member Yutaka Harada had as recently as early June signalled that the Bank was happy with the yen’s depreciation. But it will likely limit any further advances of the dollar against the yen, and the 130 level looks more distant now than it did a yesterday.