Now that the Bank of Japan has suggested that it isn’t losing sleep over a weaker currency, the yen may gravitate even lower. 

The yen has lost more than 3% against the dollar so far this year despite the war, highlighting how its fundamentals have superseded its haven status. BOJ Governor Haruhiko Kuroda remarked earlier Friday that it is “wrong” to think that a weaker yen is negative for the economy and that the monetary authority doesn’t have a need to run forex policy. With no verbal or actual intervention to stop it, the yen faces little hurdle in weakening further toward 120, consistent with a call MLIV made at the start of the year.

The BOJ has also reiterated for good measure that inflation reaching 2% -- led by a surge in commodity prices -- is different from its goal of kindling demand and that the current cost-push inflation will in fact weaken the economy. In other words, the BOJ isn’t remotely thinking of changing its policy in the face of what it legitimately sees as temporary factors. That essentially means that real-rate differentials will continue to worsen in favor of the dollar, sending USD/JPY to 120. In fact, colleague Vassilis Karamanis cites technical indicators to suggest that the pair is well set-up to reach the January 2016 high of 121.69.

 

Eoin Treacy's view

Japan has been trying to stoke inflation in the economy for years. Now that it has what it wants, it is going to err on the side of caution and allow prices pressures to force consumers to spend. There is no country that needs to reignite consumer activity more than Japan. From their perspective this is good news.

The Dollar continues to extend its breakout versus the year and a retest of the 2015 peak is looking more likely.

That should help to support the nominal value of Japanese shares. The Topix Index is bouncing from the region of the 1000-day MA.

The Topix Banks Index has been ranging for a year and is now also firming from the region of the 1000-day MA.