In contrast to the wonderfully consistent trend weakness in the yen over recent months, we have now entered a rather different phase where the currency is more volatile. As a result, the trading approach needs to be modified, to one which is more fleet-footed and less dogmatic.

As witnessed overnight following the remarks of Economy Minister Amari, yen shorts are acutely sensitive to any suggestion that the government and/or the BOJ will prevent the yen from weakening any further. That said, Amari’s remarks could be construed as being of a more general nature – he merely warned that excessive yen weakness could lift inflation, without claiming that the decline in the Japanese currency seen recently was consistent with this characterisation.

After such a huge move, it is helpful to step back slightly and look at the yen’s depreciation with some dispassion. EUR/JPY has surged 25% since mid 2012, and at just under 119 is above the 4yr average. USD/JPY has risen nearly 15% in three months and is now fractionally above the 5yr average. Finally, the yen’s real effective exchange rate has fallen 15% since the middle of last year, and is now 10% below the 10yr average. In other words, it could be contended after this dramatic readjustment that the Japanese currency is now close to fair value.

A further concern for yen shorts is that this position has fast become the overwhelming consensus. In mid-December, trader’s yen short positions reached their highest level for 5 ½ years. In the past, whenever shorts have become this extended, the trend turns around without much of a lag.

Three months after we first advocated a much more defensive posture on the yen, we are now more circumspect, at least in the near term. The shorts need a good shake-out, because the various rationale for currency weakness in Japan are in danger of becoming stale and tired. So we can expect that the yen will be much more volatile than we were used to through 2011 and most of 2012.