The Bank of Japan says it will not hesitate to take further steps to stem the sharp appreciation in the Japanese yen after the currency rallied to a 17-month high against the US dollar and raised the prospect of a complete derailment its anti-deflationary strategy.

The yen has appreciated by 12% since the beginning of the year despite the Bank of Japan’s surprise foray into negative interest rates. The strengthening plays havoc with the weak yen policy pursued by the central bank.

“A weak yen is crucial element in Prime Minister Shinzo Abe’s plan for dragging Japan’s economy out of a two decade-long affliction with deflation,” said Colin Phipps, chief economist at New York-based broker dealer, TCA Financial.

The yen’s rally has been attributed primarily to market concerns about the US Federal Reserve’s apparent dithering over the timing and the scale of interest rate increases. The currency briefly rallied to 107 versus the dollar before softening slightly to around 108. Taro Aso, Japan’s finance minister has raised the prospect of intervention, a move that could see the central bank enter the foreign currency markets to try to weaken the yen.

TCA Financial says the Bank of Japan probably realizes that intervention in the currency markets will likely provide only temporary respite. “Their options are quite limited; it’s either a matter of going deeper into negative interest rate territory or unleashing even more quantitative easing. The only beneficiary of that will be equities so we’re advising clients to hold on to their Japanese stocks,” concluded Phipps

About TCA Financial:
TCA Financial is resolutely committed to helping our clients accumulate and preserve wealth by actively managing the deployment of their investment capital within the global financial markets. We have a proven, checkable track record of being able to accomplish this regardless of the prevailing macro-economic conditions because of our expertise and professionalism and because we know that markets, just like people, are all connected to varying degrees at varying times.