The yen rallied from a 20-month low against the dollar on speculation that monetary easing bets had driven the Japanese currency down too rapidly. The yen earlier weakened to the brink of 85 per dollar after Japan’s incoming prime minister said he may change the law governing the central bank unless it boosts its inflation target. Demand for the dollar was supported as investors sought the safety of the world’s reserve currency amid concern that U.S. lawmakers will fail to avoid the so-called fiscal cliff. Japan reopened after a holiday yesterday while most other markets are closed for Christmas.
“Dollar-yen rose to try 85 on the back of Abe’s comments, but it was sold off in front of key resistance levels,” said Michiyoshi Kato, the senior vice president of foreign-currency sales at Mizuho Corporate Bank Ltd. in Tokyo. “The yen moves are probably caused by limited liquidity in the market.”
The Japanese currency touched 84.96 per dollar, the weakest since April 11, 2011, before trading at 84.85 at 4:17 p.m. in Tokyo, 0.1 percent stronger than the New York close. It gained 0.1 percent to 111.86 per euro, following a 0.8 percent slide yesterday. The dollar was little changed at $1.3183.
Shinzo Abe said on Fuji Television on Dec. 23 that he’ll consider revising the central bank law if the Bank of Japan (8301) fails to increase its inflation target to 2 percent from 1 percent at its January meeting. Abe has called for unlimited monetary easing from the BOJ to spur inflation and growth.
Abe’s Liberal Democratic Party, which swept to power in lower house elections this month, today reached an agreement with the New Komeito Party on a policy package that includes the 2 percent inflation goal. The LDP lacks a majority in the upper house, and backing from New Komeito increases the chance the package will become law.
Japan’s consumer prices excluding fresh food probably slid 0.1 percent in November from a year earlier, according to the median estimate of economists in a Bloomberg News survey before the data on Dec. 28. The so-called core inflation rate has fallen an average of 0.2 percent every month in the past decade.
“Japan’s Abe means business this time,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said in a Twitter post. “Trillions of yen to be printed. Weak yen, positive inflation.”
The yen’s 14-day relative strength index against the euro was at 23 yesterday and has been below the 30 level that suggests an asset is about to change direction since Dec. 12. The RSI against the U.S. currency fell to 22.
The dollar-yen rate “has been consolidating,” BNP Paribas SA’s currency strategy team led bySteven Saywell wrote in a research note yesterday. “Further gains for the pair are likely to slow considerably as the dovish BOJ view is already well priced in. We suspect that both overstretched technicals and positioning are playing a sizable role.”
The yen has tumbled 13 percent this year, including a 3.6 percent drop in the past month, making it the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has weakened 2.7 percent in 2012 and the euro has dropped 0.9 percent.
The implied volatility of three-month options for Group of Seven currencies rose to 7.91 percent yesterday, the highest since Oct. 1, according to the JPMorgan G7 Volatility Index. An increase makes investments in currencies with higher benchmark lending rates less attractive as the risk in such trades is that market moves will erase profits.
“Liquidity is limited in the markets amid the holiday season,” said Yuki Sakasai, a foreign-exchange strategist in New York at Barclays Plc. “A small flow of money can cause a big move in the yen. The market will be volatile until investors return.”
In the U.S., lawmakers said they were losing confidence that Congress and President Barack Obama can reach a deal within a week to avoid more the fiscal cliff. The $600 billion in tax increases and spending cuts due to take effect in January could cause a recession in the world’s largest economy.
“For the first time I feel it’s more likely that we will go off the cliff,” Senator Joseph Lieberman, a retiring Connecticut independent, said Dec. 23 on CNN’s “State of the Union” program about the fiscal cliff.
In the aftermath of House Speaker John Boehner’s failure to garner support from his caucus for his “Plan B,” which would have extended tax cuts on incomes below $1 million, Lieberman said Senate leaders now must take charge of resolving the budget stalemate.