125 Dollar-Yen uncomfortable even for BOJ

Though exchange rate is not a policy tool of Bank of Japan (BOJ), that didn't prevented Governor Kuroda to comment on it.

• According to Mr. Kuroda, further decline in Yen against dollar is unlikely as yen is already very weak. He presented his comments in lieu of real effective exchange rates.

Yen immediately has taken cue from the comments and roared against most of its counterparts. Yen traded as low as 122.5 against dollar.

Why the comments from the Governor?

• Last Friday, Yen breached 125 mark against dollar and traded as high as 125.82. In last three weeks up to Friday Yen moved up from around 119 to cross 125 mark, which suggested further rise is possible.

• This rise in Yen made many officials both at bank of Japan (BOJ) and government uncomfortable as lower yen is likely to boost import cost for companies. Japan is an energy poor nation, which imports most of its oil and LPG needs. A rise in both the prices would make wean Yen actually hurting the company more.

• Many companies like Toyota has moved their manufacturing base out of Japan as currency appreciated and reached 76 against dollar amid prevalent deflation. Now with BOJ policy, yen has weaken to 13 year low, which makes Toyota's revenue and profit hurt as it needs to import the cars to japan and sell it at higher prices.

What could be the impact?

• Immediate impact of the comments are quite clear as Yen appreciated almost 1.3% against dollar so far.

• Medium to long term impact could be mixed as at the same time BOJ governor has pledged to keep the massive ¥ 80 trillion in place. With such policy divergence it would be difficult to push yen lower against dollar as US Federal Reserve is preparing to hike rates.

• However, this means there won't be further policy easing from BOJ. That might put a cap on Dollar-yen exchange rate for now around 125. In spite of that due to policy divergence, bias remains upwards for Dollar-yen pair.

Yen is currently trading at 122.8 against dollar.