Despite a further flow of funds into overseas high-yield assets, there is a growing threat of complacency over risk conditions and the Bank of Japan’s policy.
The dollar managed to strengthen through the 115.0 level against the yen on Tuesday and this helped propel the US currency to highs near 115.80. The yen was undermined by a general improvement in risk tolerances which encouraged a flow of funds into high-yield currencies. Japanese investment funds worth around US$8.7bn are due to be issued this week and this will maintain the potential for overseas asset buying which will tend to curb yen support. The yen was close to 115.50 in Europe on Tuesday with the currency still weak against the yen.
Bank of Japan member Suda stated that there would be risks of economic overheating if monetary tightening is delayed while policy should be adjusted in a pre-emptive and gradual fashion. Suda has had a significant impact in steering policy this year and the remarks will increase speculation over a rate increase in the fourth quarter. This will provide some yen backing given that markets are only putting a 10% chance on an October increase. The opposing factors are liable to increase yen volatility.