Lee Hardman, Currency Analyst at MUFG, notes that the yen has continued to strengthen in the Asian trading resulting in USD/JPY falling below levels which prevailed prior to the BoJ’s decision to extend QQE on the 31st October 2014. Key Quotes “The yen has now increased sharply by around 15% against the US dollar since the middle of last year and is no longer significantly undervalued. According to our long-term valuation models, we estimate that the yen is now more modestly undervalued by around 6% against the US dollar. The reversal of yen weakness has accelerated following comments earlier this week from Japanese Prime Minister Abe stating that Japan will refrain from arbitrary intervention and seeks to avoid competitive currency devaluations, which have acted as a green light for yen bulls to continue pushing the yen higher in the near-term. The comments have made verbal intervention in recent days from other government officials’ sound hollow undermining their effectiveness to dampen yen strength. Bloomberg quoted an MoF official overnight stating that “there one sided moves in the yen market” and that “they will take necessary action as needed” although understandably the comments have had limited impact at restraining yen strength with the threat still low in the near-term of direct intervention to weaken the yen. However, the risk of direct intervention will increase if the yen continues to strength sharply further erasing yen undervaluation which would provide a stronger justification for action as downside risks to economic growth and inflation intensify. It is also increasing the likelihood that the BoJ will ease policy more aggressively later this month which may at least help to dampen the pace of yen strength in the near-term. A failure to act decisively in response to building downside risks to the outlook for economic growth and inflation in Japan would likely trigger a further loss of investor confidence in Abenomics and reversal of yen weakness. There is a growing sense of crisis with the Japanese equity market having lost around a quarter of its value.” For more information, read our latest forex news.