JPY: The fairy tale of excessive volatility – Commerzbank

At the G20 meeting in Brazil on Friday, Japanese Vice Minister Masato Kanda again stressed that Japan must respond to ‘excessive movements’ in FX markets caused by speculators. Such statements suggest that the foreign exchange market is sometimes driven by speculators and that an exchange rate move is not fundamentally justified, Commerzbank’s FX analyst Michael Pfister notes.

Excessive Yen volatility is on the roll

“What pace is 'excessive' for policymakers in practice? At the end of April, the acceptable pace seemed to have been exceeded when the Japanese Ministry of Finance (MOF) ordered interventions. In the last full week of April, the USD/JPY went up by almost 2.3% and continued to do so seamlessly into the start of the following week. Yen had depreciated by just over 3% by the time policymakers reacted (apparently this was too much).”

“However, if we look at the movements in recent weeks, we see that the exchange rate is just as volatile as it was at the end of April, but the MOF is unlikely to apply the same standards. Since the MOF considers the yen to be fundamentally undervalued, an appreciation is not the same problem as a depreciation.”

“However, policymakers should not talk about ‘excessive movements’ when it is only the depreciation that is a thorn in their side. When the MOF intervenes, of course, it also triggers greater volatility. The devaluation at the end of April was followed by a week of extreme appreciation, followed by another significant devaluation. So, if that's not excessive movement, I don't know what is.”