Japanese Response to Yen's Increase Affecting Everything

By: Hillel Fuld

The big question remains whether the Japanese authorities will further actions to curb the JPY’s rise. This lack of clarity brought the US currency to hover around a 15 year low against the Yen, weighed dow by a decrease in IS treasury yields.

The USD decreased to as low as 85.11 JPY in early Asian trading, reaching sight of a 15-year low of 84.72 yen, which was actually hit last week on trading platform EBS.

The greenback’s fall was a result of the previous day's slide in U.S. Treasury yields, while selling by Japanese exporters at around the 0100 GMT Tokyo fixing also weighed on it, traders said.

The yen's rise was limited, however, with traders hesitant to push the currency higher as they waited to see if the government or the Bank of Japan will decide to take new steps to rein in its export-sapping strength.

Helping to reinforce such caution, a government source said Prime Minister Naoto Kan and the back of Japan Governor Masaaki Shirakawa are likely to meet as early as the beginning of next week.

The meeting may be brought forward to later this week, the source said, depending on how the market develops.

"There is a trend of dollar weakness stemming from moves in U.S. Treasuries, but the yen has reached danger levels so it's becoming a little hard to chase it higher," said a trader for a Japanese trust bank.

Direct yen-selling intervention is not expected, although the chances of that cannot be ruled out. For example if the yen's rise gains more steam or the benchmark Nikkei share average .slides below 9,000, the trader said.

The more likely response from Japanese authorities would be some form of monetary easing by the BOJ, the trust bank trader said.

The USD held steady against the yen from late U.S. trading on Monday at 85.32 yen.

The benchmark 10-year Treasury note yield dove more than 10 basis points to hit a 17-month low of 2.563 percent on Monday, according to Reuters data.

There has been a significant correlation between U.S Japanese government bond yield spreads, which have been narrowing, and the dollar/yen rate.

In the latest comments on the yen by a Japanese official, Economics Minister Satoshi Arai was quoted by Kyodo news agency as saying the yen's rise may not cease with vocal intervention alone, adding that its rise may be in the final stage.

Former Japanese currency policy chief Hiroshi Watanabe said Japan may step into the currency market, possibly on its own, if the JPY climbs about 3 yen versus the dollar in a day.

But he said Tokyo does not need to take action now to stem the yen's strength, given that it is not rising that fast.

The dollar index, a gauge of its performance against a basket of six major currencies, declined 0.4 percent to 82.248 .DXY.

The USD index has near-term support at an Aug. 13 low of 82.182 and an Aug. 12 trough of 82.109, while resistance is seen at a July 21 high of 83.451.

The EUR edged up 0.3 percent to $1.2862, pulling away from a one-month low of $1.2732, which was reached the previous day on EBS.

However, analysts and traders said the euro remains vulnerable to concerns about the health of Europe's banking sector and the sovereign debt situation in peripheral economies.