When Eisuke Sakakibara served as Japan’s vice-minister for finance, from 1997 to 1999, the Japanese currency was notoriously volatile.
In a few weeks after the Russian financial crisis of mid-1998, the man dubbed “Mr Yen” watched it soar 20 per cent.
Given that experience, he shrugs off this week’s seemingly violent appreciation, which has fuelled speculation that the huge yen carry trade is being unwound.
Since Tuesday’s sharp fall on the Shanghai stock exchange triggered global turmoil this week, the yen has moved from more than Y120 to the dollar to as low as Y116.96.
According to Bloomberg calculations, its 3 per cent appreciation this week has marked its strongest weekly surge in 14 months.
“A 2 per cent change in the [foreign exchange] market is nothing,” Mr Sakakibara says.
“When I was the vice-finance minister, that kind of adjustment took place every week.”
So long as interest rate differentials with the rest of the world remain so wide, he says, the likelihood of money rushing back to Japan is slim.
The past few days’ volatility on Japanese currency, stock and bond markets is a symptom of what he considers the real cause of concern: overheating in China and India and the end of “euphoria about a soft landing of the US economy”.
None of this means Mr Sakakibara, now a professor at Waseda University, is blase about the size and tangled tentacles of the carry trade, in which investors swap cheap yen for higher-yielding assets abroad.
Japan’s rates, raised a notch to 0.5 per cent just last week, are still 300 basis points lower than those in Europe and 475bp behind those of the US and UK.
“It is a very unusual situation. Japan has virtually zero interest rates while the rest of the world is still tightening. This needs to be rectified,” Mr Sakakibara says.
Most economists say that, until the rate differential with leading currencies narrows to 200bp-300bp, the incentive to arbitrage remains strong.
Markets are expecting only one further rise in Japan this year, which would take overnight rates to a still modest 0.75 per cent.
Mr Sakakibara, who argues that such low rates have a distorting effect, would like a more rapid normalisation of the interest rate environment than the Bank of Japan has been able to achieve.
He rejects any suggestion that last week’s rate rise could have spooked currency markets or carries the potential to choke off Japanese growth.
“It has no significant impact whatsoever on the domestic or the international economy,” he says.
Tohru Sasaki, chief foreign exchange strategist for JPMorgan Chase Bank in Tokyo, says that, of the Y40,000bn he estimates to be committed to the carry trade, only about a quarter is held by margin traders and hedge funds.
By his calculations, Y30,000bn is in much more stable, long-term investments held by funds and retail investors in the form of foreign currency-denominated bonds.
“Some people say the yen carry trade is being unwound but, technically speaking, this is just the unwinding of short-term positions,” Mr Sasaki says.
He expects the yen to continue trading in a fairly narrow range this year.
Some economists say there could even be further downward pressure caused by outflows of investments by retiring baby boomers, who are due to receive up to Y50,000bn in lump sum payments over the next three years.
“Both the BoJ and the government should be worried about yen weakness. I think it is a kind of a bubble,” says Mr Sasaki.
When it pops, he expects the yen to slide to about Y95 to the dollar within months.
“If [the carry trade is] heavily unwound it will collapse very quickly. But I don’t think this will happen this year or even next.”