Lee Hardman, Currency Analyst at MUFG, notes that the yen has continued to strengthen in the Asian trading session which has contributed to today’s plunge in the Japanese equity market which re-opened after yesterday’s National Foundation Day public holiday. Key Quotes “The Nikkei 225 index has declined overnight by around 5% taking its cumulative decline so far this year to over 20% and almost 30% since last year’s peak. The sharp strengthening of the yen and weakness in the domestic equity market continues to increase the likelihood of a significant policy response from Japan. Japanese officials have stepped up verbal intervention again overnight in an attempt to dampen yen strength. Japanese Finance Minister Aso has stated that recent market movements have been rough which they are watching with urgency. He reiterated that sudden FX movements are not good. If needed he stated that Japan will make the necessary policy response to market movements. He declined to comment on whether Japan had intervened yesterday. Japanese Economy Minister Ishihara has also spoken overnight repeating the view that recent FX moves have been rough and that abrupt moves are undesirable. In contrast, BoJ Governor Kuroda was understandably less comfortable when asked to comment overnight on the yen stating only that currencies should be stable and reflect economic fundamentals repeating the G7 mantra. He defended the BoJ’s recent decision to implement a negative rate stating that it was not responsible for the yen’s recent surge. He attempted to provide some reassurance as well stating that there was no way that deposit rates for individuals will go negative. Further sharp yen gains would increase the likelihood of direct intervention to dampen yen volatility if verbal intervention proves ineffective. Recent negative developments are increasing the likelihood that the BoJ will ease monetary policy further. Their next policy meeting is not until mid-March which is fuelling speculation that the BoJ may even call an emergency policy meeting. Intensifying risk aversion amongst global investors is supporting a stronger yen in the near-term, although the rising likelihood of policy action is increasing the risk of a sharp reversal.” For more information, read our latest forex news.