If a war has been waged in the global foreign exchange markets for the past few years and a truce has just been declared, as some investment strategists claim, then Japan could be forgiven for wanting the conflict to resume.
Since the Bank of Japan stunned financial markets on Jan. 29 by adopting a negative interest rate policy, the yen has surged nearly 11% against the dollar. That was exactly the opposite of what the central bank intended with its aggressive rate cuts and dealt another blow to "Abenomics," the three year-old reflationary program of premier Shinzo Abe that has conspicuously failed to ignite inflation and growth. While the yen weakened a little last week as global equity markets rallied, the damage has already been done.
Foreign investors have lost confidence in Abenomics and have sold a staggering $46 billion of Japanese stocks since the beginning of this year, according to data from Bloomberg. This has resulted in the longest sell-off since a 16-week stretch in 1998. With foreigners accounting for 70% of trading on Japan's stock market, it is not surprising that the exporter-sensitive Nikkei 225, Japan's main equity index, has fallen 14.5% since the start of this year.
The yen's appreciation despite the BOJ's ultra-loose monetary policies stems from a number of factors. These include its "safe haven" status in periods of risk aversion and the repatriation of foreign earnings by Japanese exporters before the close of the fiscal year on March 31.
The focal point for markets, however, is the rapidly diminishing effectiveness of the BOJ's monetary policies -- exacerbated by a backlash against negative interest rates -- at a time when the dollar has weakened significantly because of the more dovish stance of the U.S. Federal Reserve.
The outcry over negative rates -- which has been equally fierce in the eurozone -- and speculation that a "dollar detente" was agreed at a meeting of Group of 20 finance ministers and central bankers in Shanghai in late February are fueling volatility in foreign exchange markets and, according to some strategists, opening a new front in the currency wars. (The term "currency war" is often associated with former Brazilian finance minister Guido Mantega, who in 2010 claimed governments around the world, led by the U.S., were competing to lower their exchange rates in order to boost their competitiveness.)
Some proponents of a currency war now believe a truce has been declared in order to stabilise foreign exchange markets and support global growth. Adherents of this theory base their case on the pledge by G-20 policymakers to refrain from currency devaluations. In an effort to stabilise the dollar versus the euro and the yen, the Fed will pare back expectations for further rate rises this year while the BOJ and the European Central Bank will shift the focus of their monetary easing away from measures designed to weaken currencies (such as negative rates) and toward efforts to boost bank lending and spur demand.
A far more compelling argument is that global currency markets are merely reflecting growing uncertainty and skepticism about central banks' monetary policies.
According to this month's Global Fund Manager Survey, published by Bank of America Merrill Lynch (BAML), the biggest tail risk in markets right now is "quantitative failure," or the risk that monetary policies lose their potency, making it much more difficult for central banks to stabilize markets during periods of financial turmoil.
The most conspicuous example of this -- and by far the most troubling one given the loss of confidence in Abenomics -- is the recent appreciation of the yen, particularly in view of the difficulties faced by Japanese policymakers in pushing the currency down.
On April 15, Jack Lew, U.S. treasury secretary, urged his Japanese counterpart Taro Aso to respect the G-20 pledge to refrain from currency devaluations, amid growing concern in Tokyo about the strengthening of the yen.
Even if the yen resumes its recent appreciation, piling more pressure on the BOJ to halt the rise with more stimulus at its next policy meeting on April 27-28, Japanese policymakers are fighting a losing battle.
As Eisuke Sakakibara, Japan's former deputy finance minister known as "Mr. Yen" for his ability to move the currency, rightly noted in an interview with Bloomberg on April 12, Abenomics has more or less reached its "sell-by date," rendering any intervention to weaken the currency futile.
The most that Japanese policymakers can hope for is that the recent improvement in risk appetite persists, reducing demand for haven assets such as the yen.
Yet this week, sentiment was already beginning to deteriorate again because of the failure by the world's biggest oil producers to agree a freeze in production, causing another drop in oil prices.
The yen's rise has almost certainly not yet run its course. This will put further strain on the BOJ and throw the limits of monetary policy into sharper relief.
Nicholas Spiro is a partner at Lauressa Advisory, a specialist property and macroeconomic consultancy in London.