Fundamental Forecast for Japanese Yen: Neutral

The Japanese yen continued to appreciate against the U.S. dollar during the final week of April, with the exchange rate slipping to a fresh monthly low of 81.08 on Friday, but the near-term rally in the low-yielding currency may taper off going into May as speculation for a currency intervention resurface. Japan’s Ministry of Finance said that the government did not sell the local currency between March 30 and April 26 despite the recent appreciation in the Yen, but the Group of Seven may take additional steps to aid the ailing economy as the Bank of Japan curbs its assessment for the real economy.

After unanimously voting to keep the benchmark interest rate at 0.10% earlier this week, board members of the BoJ rejected Deputy Governor Kiyohiko Nishimura’s call to expand the asset purchase program by JPY 5 trillion in order to further assess the aftermath of the devastating earthquake and tsunami that has crippled the economic recovery, and sees GDP increasing at an annualized pace of 0.6% this year amid an initial forecasts for a 1.6% expansion back in January. At the same time, the central bank now sees inflation increased 0.7% in 2011, which compares which compares with the 0.3% projection from earlier this year, and pledged to take the appropriate steps when needed as policy makers aim to balance the risks for the region. As Standard and Poor’s lowers it credit outlook for the region to negative, the BoJ may face increased pressures to underwrite public debt as Prime Minister Naoto Kan tries to push a JPT 4 trillion stimulus package to aid with the relief efforts, and controlling inflation will turn into a cumbersome task should the central bank embark on government bond purchases.

Nevertheless, as carry trade interest gathers pace, the Japanese Yen may continue to lose ground against its major counterparts, but the USD/JPY may buck the trend given the bearish sentiment underlying the U.S. dollar. In turn, currency traders may put the dollar-yen to the test in the following month, and speculation for a Yen intervention is likely to spark increased volatility in the exchange rate as the pair continues to retrace the sharp rebound following the coordinated measures taken by the G7.

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