In an Article IV consultation report on the Japanese economy released on Tuesday, the IMF judged that yen gains during the past year were partly driven by safe-haven capital inflows that have resulted in the yen becoming “moderately overvalued from a medium-term perspective”. The IMF also recommended that the Bank of Japan’s (BoJ) asset-purchase programme could be expanded substantially beyond its current plans to increase the likelihood of achieving its 1% inflation goal by end 2014.
The organization also noted that intervention could be used to avoid disorderly yen strength should safe-haven flows intensify, although it should remain in the context of a market-determined exchange-rate system.
| IMM speculators flip short yen positions |
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| Source: Scotiabank, IHS, CFTC |
David Lipton, the IMF’s first deputy managing director, says Japan, like other advanced economies, should have a floating exchange rate set by the markets.
“However, because of Europe, we see volatile capital flows,” he adds. “Intervention can be used to avoid disorderly markets, but that should come in the context of free-floating markets.”
The comments come as positioning data from the Commodity Futures Trading Commission showed short-term speculators last week switched from short yen positions to long yen positions for the first time since February.
Michael Derks, chief strategist at FxPro, says the BoJ, which meets on Thursday, will welcome the comments from the IMF.
He says the BoJ has been criticized domestically for failing to do enough to support the recovery, despite raising asset purchases by ¥20 trillion ($250 billion) in April.
“That said, with the deteriorating international environment and expensive currency both weighing on demand for exports, the BoJ is surely examining its options” adds Derks.