Research Team at BBH, suggests that although speculators in the CME futures market have been buying yen and are net long, we do not think that is the main driver. Key Quotes “We think the unwinding of short yen funding positions is playing a key role. As s a subset of this, many foreign investors that had bought Japanese stocks (record corporate profits, easier BOJ policy where QQE also includes equity purchases) had also hedged out the currency risk. As Japanese equities are liquidated, the hedge is bought back. The bar to material intervention is high. Through the 2008-2009 crisis, there was no G7 intervention in the foreign exchange market. During the campaign in 2012, Abe and his advisers had talked the yen down. They were reprimanded by the G7 and a new agreement was signed that reiterated the "arms control agreement" not to manipulate exchange rates. Of course, letting markets determine exchange rates is only one part of the G7/G20 position on foreign exchange. The other is excessive volatility needs to be avoided. Here is where Japan is on more solid footing. Yet the bar to intervention still does not appear to have been met. Three-month implied volatility is near 13.75% now. It is the highest since mid-2013 when it spiked over 16%. In March 2011 when it jumped to 17.5% (earthquake/tsunami) the G7 did intervene in a joint exercise. Ahead of the G20 meeting later this month, we think the material risk of unilateral BOJ intervention is modest at best. Unilateral intervention would risk criticism of Japan and give fodder to claims, mostly in the media and some market commentary, of a currency war. That the BOJ could cut rates further into negative territory is fundamentally different than intervention in the foreign exchange market. And even before this surge in the yen, which we argue is driven by the flows in the circuit of capital (funding and hedging) than true safe haven buying or speculation (minor role), many expected further cuts in the tiered- reserve system that the BOJ had introduced.” For more information, read our latest forex news.