News analysis: Japanese officials express concern about yen's rapid drop vs. USD

Japanese government and central banking officials have expressed their concern recently about rapid currency fluctuations in the market, with particular reference to the yen's plummet to a near eight-year low versus the U.S. dollar yesterday, with worries being further punctuated Thursday as the Japanese currency plunged further, hitting a 13- year low against the greenback.

Bigwigs from the finance ministry, the central bank and even Prime Minister Shinzo Abe's own top government spokesperson have voiced their rising concerns over the yen's weakness over the past two days, with the general consensus being that such rapid movements in the currency market were not conducive to Japan's overall economic situation.

The Japanese currency plummeted to 124.30 per U.S. dollar on Thursday, marking its lowest level since 2002 and Abe's top spokesperson, Chief Cabinet Secretary Yoshihide Suga, said he was concerned that such sudden exchange-rate moves, as have been seen in the past couple of days, run contrary to shared notions about such moves from the Group of 20 nations.

"As agreed by the G20, sudden moves in foreign-exchange markets are undesirable and for the latest moves, we'd like to continue to monitor them carefully," Suga told a news conference in Tokyo in response to the dramatic currency moves recently.

But economists were quick to note that Suga's remarks served to trigger further yen selling today as he was, intentionally or not, underscoring an internationally held view that a weaker yen -- although not to today's extent -- is tenable, if not widely expected.

"Suga's comments sparked yen selling to touch the key level. The fact he just reiterated the globally confirmed view is taken by markets to be a tolerance of yen weakness," said Yuji Saito, director of foreign exchange at Credit Agricole SA, adding that further declines were possible in light of the U.S. Federal Reserve's possible moves to hike its key tax rate, and those of the central bank here, at some point in the future, as it struggles with its lofty reflationary efforts.

Federal Reserve Chair Janet Yellen stated on Friday that if the U.S. economy continues to improve it will be "appropriate at some point this year" to take the initial step to "raise the federal funds rate target."

Conversely, the Bank of Japan (BOJ) will likely maintain its monetary easing policies, at least for the time being, according to the latest remarks from its chief, Gov. Haruhiko Kuroda, who said it is "too early to discuss when the monetary easing should end."

The two contrasting moves from the central banks, will almost certainly ensure that the yen is pegged at a weak level for now versus its major counterparts, leading economists here proffered Thursday, despite Japanese authorities' mounting concern about the recent rapid currency fluctuations.

In the shorter term, however, Kuroda told local press in Dresden, Germany -- where a Group of Seven finance leaders' meeting is currently being held -- on Wednesday that, "It's desirable that foreign exchange rates stay stable and reflect economic and financial fundamentals."

Japanese Economics Minister Akira Amari, for his part, has also stated that while the recent foreign-exchange movements reflected the dollar's gains more than it did the yen's losses, he too also described the current situation as "undesirable," adding that a recent slew of positive macroeconomic data in the U.S. has bolstered the Federal Reserves' arguments to hike its key interest rate at an earlier juncture than markets had previously anticipated.

While Amari said that markets had overreacted to the possibility of the Fed hiking its tax rate sooner rather than later, market players here and economists said that the impact on global currency markets and major bourses around the world when the Fed does decide to hike its rate would be profound, despite Japanese officials playing down the issue in a bid to lower the current levels of yen selling.

Finance Minister Taro Aso, who has previously stated he is well aware of the potential effects on global markets when the Fed hikes its rate, has also said that he is concerned about the yen's continued slide.

"In general, excessive exchange-rate volatility is undesirable, " Aso told a news conference here, prior to heading to the G7 finance leaders' meeting in Germany.

Japan's currency has dropped more than 30 percent since Prime Minister Shinzo Abe came to power in 2012 and up until last week, the yen had been trading in a range of just two yen around 120 per U.S. dollar this quarter.

But in New York overnight, the dollar hit 123.33 yen, its highest level since July 2007 amid expectations of the Fed's interest rate hike occurring this year. The yen itself was logged at 123.74 per dollar at 7:58 a.m. in London (4:58 p.m. JST) and at 124.30 per U.S. dollar here on Thursday during trading hours, marking its lowest level since 2002.

The ongoing decline of the yen will likely be perpetuated by traders repositioning themselves to deal with the Fed's interest rate hike, now believed by experts on the matter to be implemented later this year, with upcoming macroeconomic data due out from the world's largest economy soon, including a key employment report on Friday, likely to have a major bearing on further yen-dollar moves.

"The market is currently racing ahead in pricing in a rate hike for September. Whether the dollar keeps gaining will depend on data, and if next week's jobs report is strong, that could change the picture. In that sense, next week is crucial," said Koji Fukaya, chief executive officer and currency strategist at FPG Securities Co.

The yen has lost 3.4 percent in May, it's biggest drop since November last year when it fell 5.3 percent that month after the BOJ suddenly unveiled an expanded stimulus program on Oct. 31 and hence the ongoing trend of the yen tumbling and trading far lower against the U.S. dollar will likely accelerate as investors anticipate the gap between Japan and U.S. interest rates widening.

Market strategists here have also said that, generally speaking, investors prefer the U.S. dollar to a low-interest yen, as there is a tendency to believe that the U.S. dollar is more profitable.

But a weaker yen has always generally supported Japan's export led economy, although batters the balance sheet when import costs are totted up and dents consumer sentiment as imported goods like some food items become more expensive. Overall, however, a weaker yen propels the buying of exporter-related stocks, such as automobiles and electrical appliances, as their competitiveness in overseas markets is boosted when the yen is weak and their companies' profits grow when the yields are repatriated on favorable exchange rates.

While a weaker yen has its benefits for the economy here, to the extent that when the yen rises too high, the finance ministry and the central bank will intervene into currency markets to manipulate its depreciation, the recent sizable currency fluctuations are out of the government's hands for the time being and hence the rising concern, local economists here said, adding that the government hailing its trade deficit returning to the black on May 27, may be short-lived if the yen continues to slide and the price of energy imports recover to regular levels. Endi