The yen is supported by favorable economic and corporate earnings prospects.
The market has taken comfort from a strong pickup in capital spending in the information technology sector in particular.
Listed firms as a whole are now expected to chalk up a double-digit profit increase for the current business year.
Against this backdrop, the financial markets have reacted calmly to the Bank of Japan’s decision to end its “zero-interest-rate” policy.
Critical foreign comments on the shift have turned out to be off the mark.
Still, worries remain over potential drags on the economy, including doubts about economic strength in other countries and Japan’s bloated public debt.
The U.S. economy is showing signs of cooling, while interest rate hikes by the European Central Bank have cast a long shadow over the euro-zone economy.
Signs of weakness in economies overseas could put the brakes on Japan’s exports.
After having earmarked 8 trillion yen last fall to spend its way out of the recession, the government is now having little choice but to cut back on fiscal spending.
With signs of a pickup in consumer spending still nowhere in sight, BOJ credit-tightening appears unlikely in the foreseeable future.
Yields on government bonds have edged higher of late amid expectations of economic recovery and fears of a negative impact of the government’s deficit spending.
Foreign investors might turn cautious about building their Japanese portfolios further in light of rating agencies’s moves to question whether Japan’s public debt still deserves a high rating.
In such a case, a bout of foreign selling could send the bond market reeling, leaving domestic institutional investors with considerable losses.
There are signs that international investors stepped up purchases of Japanese government securities in recent months, adding to the balance of holdings estimated at 22 trillion yen at the end of March.
In short, with the currency market locked in a cross-current between fears of a falling flow of foreign capital and expectations of an increased outflow of Japanese capital, the yen could run into resistance when it approaches 105 to the dollar.
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