G7 officials have always argued that exchange rates need to reflect underlying economic fundamentals. The value of the yen is doing just that. The main reason for the recent weakness has been the disappointing economic data from Japan, which contrasts sharply with the generally positive news from the US and Europe. The best hope for a recovery in the yen is therefore an improvement in the data which would allow the Bank of Japan to take interest rates back to more normal levels. However, we continue to think that improvement will start as soon as this Thursday (15th February), when the fourth quarter GDP data are released.
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