The yen has remained under pressure over the past 24 hours, undermined by yield differentials and anticipation of further US interest rate rises. The Japanese currency weakened to 118.60 in local trading on Thursday and was unable to make a significant recovery, but great caution will be required.
The comments from Bank of Japan member Muto will undermine the yen as he stated that the conditions for a monetary tightening were not yet in place. He also stated that interest rates will remain very low even when liquidity conditions are tightened. Muto is, however, on the dovish wing of the central bank and there will be tougher views within the bank. The yen will still need a clear commitment to tightening to be in a better position to sustain an gains.
The latest capital account data recorded that there were further strong inflows into Japan while Japanese investors sold overseas bond holdings. These capital account figures reinforce the risk that yen losses are being led by speculative funds. There will be the risk of capital repatriation ahead of the fiscal year-end and further capital flows back to Japan would risk a sharp correction stronger in the Japanese currency.
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