Yen tumbles to lows as shorts grow

Japanese authorities underline commitment to end deflation

The yen slid to a six-month low against the dollar on Monday as Japanese authorities underlined their commitment to end deflation and as the deal over Iran’s nuclear programme boosted investors’ appetite for riskier assets.

Japan’s government faces growing scepticism from investors over its commitment to follow through on structural reforms that are supposed to constitute the “third arrow” of the “Abenomics” stimulus programme.

But Haruhiko Kuroda, the Bank of Japan’s governor, told a financial forum on Monday that the bank remained committed to its aggressive stimulus and would “adjust its policy as necessary” to bring inflation up to a 2 per cent target by 2015.

The yen slipped to a trough of Y101.91 against the dollar and briefly hit a four-year low of Y137.98 against the euro. According to the Bank of England’s calculation of the effective exchange rate, it had fallen to a five-year low against sterling.

“As the market is currently not trusting the BoJ to actually reach the 2 per cent level . . . there is still scope to the upside as far as inflation expectations are concerned. That means that speeches like Kuroda’s still hold the potential to produce marginal effects,” said Ulrich Leuchtmann, currency strategist at Commerzbank. He added: “Kuroda is well aware of the fact that it is about time for him to dust down the verbal interventions tool again.”

Whatever investors’ doubts over Abenomics, shorting the yen has become one of the most popular currency trades for hedge funds in recent weeks, reflecting expectations that the Bank of Japan will ease monetary policy again next year, while the US Federal Reserve will eventually begin scaling down its stimulus.

Data from the Commodity Futures Trading Commission shows that speculators’ short bets on the yen increased by $2.1bn in the week to November 19 to reach a total of $14bn – the biggest net short position since 2007, excluding one week in December 2012.

Strategists at Nomura said the selling trend had continued to the end of last week, bringing the net short position to $14.4bn.

While this could make the yen vulnerable to a sudden change in market sentiment, its weakness was on Monday compounded by geopolitical developments. The deal with Tehran drew investors away from haven currencies, with the Swiss franc falling alongside the yen.

Analysts also took note of renewed tensions between China and Japan, as Shinzo Abe called on China to reverse its unilateral declaration of an “air defence identification zone” over disputed territory in the South China Sea.

Mr Leuchtmann said that geopolitical risks “could quickly become an issue in the Pacific region, which makes it increasingly questionable whether the yen would be able to act as a safe haven under these circumstances.”

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