What can Japan do about a stronger yen?

The surge in the yen against the US dollar has understandably raised expectations of further action to weaken the Japanese currency. We think the Bank of Japan is unlikely to intervene directly in the markets, in part because the latest moves are not obviously “excessive” or “disorderly”. What’s more, we continue to expect the yen to fall back of its own accord as safe-haven flows reverse and monetary policies diverge again. Nonetheless, the Bank of Japan could accelerate this process by cutting interest further and – probably more effectively – by stepping up its asset purchases again.