There have been three episodes in the past twenty years when the yen has rebounded substantially following a sustained period of depreciation. In each case, the trigger was an increase in financial market volatility. Yet while volatility is currently low by past standards, we suspect that any pick-up would not give Japan’s ailing currency as big a boost as it has in the past. The reason is the yen’s diminished use as a funding currency for “carry trades”.
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