Should the BOJ fret about the yen’s recent move?

Since the start of this year USD/JPY breached the level of 120 and fell to 117-118 in the recent one week. Compared to the end of 2015, the yen has appreciated 1.7% versus the dollar, 1.9% versus the euro, 3.0% versus the Chinese yuan, and 4.1% versus the Korean won. 

Compared to the earlier declines the rise of the yen has remained very small - the JPY NEER fell sharply by 30% between end-2012 and end-2015 due to the implementation of Abenomics and aggressive easing of monetary policy. From a long-term perspective, the current level of the yen remains weak rather than strong. 

The appreciation of the yen in the past few days was mainly due to risk aversion and demand for safe assets, triggered by the high volatility in China's FX and stock markets. The sentiment-driven move tends to be drastic but short-lived. And the impact on the real economy should be fairly limited. Things will only change if the yen's appreciation becomes a trend - which results in a persistent decline in import prices and counteracts the BOJ's efforts of reflating the economy. 

The BOJ is expected continue to focus on its 2% inflation target, closely watching indicators like inflation expectations and wage growth that have important implications for the longer-term price trend. The decline in inflation expectations in the corporate sector, as revealed by the 4Q15 Tankan survey, has prompted the BOJ to tweak policy in Dec15 to increase the buying of ETFs and long-term government bonds. 

"We think the BOJ will be keen to see the wage data in the new fiscal year after the spring labor negotiations. There is no urgency for the BOJ to make further policy adjustments, at least for the first quarter", says DBS Group Research.