Yen for weakness

Yen slide will encounter little political friction

Some Japanese officials sound a little ambivalent about their currency falling to 12-year lows against the dollar. One is top government spokesman Yoshihide Suga, who says excessive foreign exchange moves are undesirable and that there are both pros and cons to a weaker currency. Mixed feelings, though, don't amount to resistance. Traders are likely to encounter little political friction as they drive down the yen.

For one thing, nothing about the yen's slide to 124.46 per dollar on May 28 is actually too unruly. True, this is the weakest the Japanese currency has been since 2002. But the standard measures of weekly and monthly swings in the exchange rate are at about half of their December levels. True, traders expect more skittish moves in the coming months, to judge from a rise in options prices. But even these implied volatility gauges are well below the highs of the past half-year.

Suga is, of course, right to point out that yen weakness is a double-edged sword. Import prices rise, and firms may struggle to pass their higher costs on to consumers.

In particular, resource-poor Japan has to import all of its oil, and the combination of rebounding crude prices and a falling yen has pushed the local currency cost of a barrel of oil up by 43 per cent since mid-January.

However, the Japanese authorities are actually hungry for inflation. Janet Yellen may be planning for a rate rise at the US Federal Reserve, but Bank of Japan Governor Haruhiko Kuroda is constrained by a still patchy economic recovery and very low inflation. The expected date for reaching the two per cent target rate keeps receding. Core consumer price inflation is nearly zero, after stripping out the effect of a 2014 sales tax increase.

Indeed, the BoJ is in full stimulus mode, after accelerating the pace of asset purchases in October 2014. It is already buying government debt, exchange-traded funds and Japanese real estate investment trusts. Kuroda may have to do even more if prices continue to stagnate. Traders will rightly focus on what Japan is doing, not its rhetorical ambivalence.