TOKYO: The yen steadied on Friday after plunging to a six-and-a-half month low against the dollar in the previous session on expectations a new Japanese government could push the Bank of Japan to adopt interest rates of zero or below.
Strategists remained divided over whether the Japanese currency has entered a new weaker phase against its major counterparts, or whether its dramatic drop this week will prove to be an aberration.
The dollar has rallied more than two percent against the yen over the past two sessions after Japanese Prime Minister Yoshihiko Noda said he was ready to dissolve parliament's lower house on Friday for an election on Dec. 16.
"The substantial weakening of the yen in the past 48 hours has a lot of people rethinking their game plan," Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
Shinzo Abe, leader of the main opposition Liberal Democratic Party and likely to be Japan's next leader, called on Thursday for the country's central bank to adopt interest rates of zero or below zero to spur lending.
BOJ Governor Masaaki Shirakawa has opposed cutting rates to zero, but his five-year term ends in April and the new government can choose his replacement.
"We know that parliament's being dissolved, and the new Liberal Democratic government, when formed, is likely to be more proactive in trying to manipulate the Bank of Japan into further easing, including the potential for moving short-term interest rates negative," said Wilkinson.
"It seems like perhaps the makings of a shift in the value of the Japanese yen," he said.
The dollar last traded at 81.05 yen, down about 0.1 percent from late US trading, with traders citing a large options barrier at 81.50 yen and stop-loss orders placed above it.
The dollar rose to as high as 81.46 yen on Thursday on trading platform EBS, its highest level since late April, and just shy of the 61.8 percent Fibonacci retracement from its March high of 84.18 yen to its September trough of 77.13 yen, which is at 81.49 yen.
On the downside, stops are seen at the former resistance area at 80.60 yen to 80.70, with 80.55 yen cited as 38.2 percent retracement of the pair's most recent rise from 79.07 yen on Nov. 9 to its Thursday high.
"The pace of the yen's fall this week has been rapid, and a correction is possible, but I've believed that weakness is ahead for the yen ever since September when the BOJ's (Takehiro) Sato said in an interview that it should take more steps," Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
Sato, a former Morgan Stanley economist appointed to the BOJ's policy board this year, called for consideration of new measures to lift Japan's economy.
But while further yen weakness in coming days is possible, there has been no significant change in yen flows and yield differentials between the US and Japan, according to Tohru Sasaki, FX Strategist at JPMorgan.
Therefore, the dollar's current rally does not change the medium-term view that the pair will eventually fall back to below 80 yen again, Sasaki said in a note to clients on Friday.
"If current yen weakness is just because of speculation caused by the comments from PM Noda and possible next PM Abe, it is unlikely to be sustainable," he said.
The BOJ is set to hold steady at a policy meeting next week. It might also defy market expectations of action next month and hold off on any further monetary stimulus until early next year to size up the policies of a new government, sources say.
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