The financial markets will disappoint your yen for stability

livemint.com:

As we go to press Thursday financial investors are already choosing to forget the tremors that hit global markets Monday. The theory appears to be that after a brief period of policy-induced upset, global finance has stabilized and we’re out of the woods. Alas, dear friends, we’ve barely wandered into the forest.

To see why, it helps to understand the most important phenomenon of this week. It wasn’t the stock-market dips on Wall Street or in Europe, as unpleasant as they were. It was, and is, the rapid appreciation of the Japanese yen, a currency that now joins U.S.

commercial real estate on that elite list of potential triggers of a global emergency. Emphasis on “rapid." The yen hit a 38-year low of ¥162 to the dollar in early July. By Monday it had surged to around ¥144, a 12.5% jump, and now appears to be stabilizing around ¥147.

Of significance for global markets, this yen swing likely is different from the currency’s oscillations in recent years. Yen trading of late has been marked by a pull and push between traders trying to pull the currency down and a worried Finance Ministry intervening sporadically to push it back up. Now, however, the central bank is getting involved.

Bank of Japan Gov. Kazuo Ueda last week described an excessively weak yen as “an important risk" to the economy and said the exchange rate was “one of the reasons for the policy decision" to increase the short-term interest rate to 0.25%. It’s rare for a developed-economy central banker to comment so bluntly on exchange rates.

Bet against a finance ministry all you want; a bet against a determined central bank tends to lose. Memo to markets: A yen near or below ¥160 isn’t coming back. This statement probably had a bigger effect than the rate