Traders confused over mixed signals on yen policy

Traders are having problems second-guessing the Japanese government’s policy on the yen, after the currency's firming to ¥132.38 against the dollar yesterday. This followed the yen hitting a three-year low of ¥133.70 the day before.

The yen’s strengthening was said to be spurred by comments by Japanese finance minister, Masajuro Shiokawa, who said the yen’s recent decline had been a “little too rapid”. The yen has fallen by about 10% against the dollar since November 2001.

But economic and fiscal policy minister Heizo Takenaka said the decline was not too rapid, leaving foreign exchange traders flummoxed as to whether or not the Japanese government will act to strengthen the yen.

The Bank of Japan decided against buying ¥200 billion of foreign bonds at a policy meeting in November, after considering a motion put forward by board member Nobuyuki Nakahara. The board member denied it would constitute a form of currency intervention.

But some dealers believe the yen still has more ground to lose against the dollar, despite the apparent ambiguity on Japanese monetary policy. Proprietary traders at a major US investment bank were said to have bought short-dated, one-month yen puts/dollar calls on a total notional of at least $2 billion, according to one recent press report. Such a position is a one-way bet that there will be further declines in the yen's value against the dollar.