Japan’s yen is apparently defying gravity, boldly strengthening in the face of unprecedented monetary easing and an experiment with negative rates that has confounded traders and economists alike.

So what’s behind the rally in the yen, which has jumped 10% since late January?

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NIRP Fizzles

Last week the yen rose to its strongest level against the US dollar in 17 months, with USDJPY back where it was when the Bank of Japan went nuclear and cranked up the printing presses with a mammoth quantitative easing scheme that makes the Federal Reserve’s bond-buying look paltry by comparison.

The rally has coincided with the BoJ following the lead of several European central banks (including the ECB) in rolling out negative interest rates for the first time.

A negative interest rate policy (NIRP) is designed ostensibly to ease credit conditions further. But the experiment so far is not yielding the results that the BoJ wants. 

In a note to clients, Pimco warned that “financial markets increasingly view these experimental moves as desperate”, adding that “NIRP is possibly one of the major catalysts behind the tightening in global financial conditions”.

Fed Doves Coo

The whole yen strength story is arguably just the other side of the dollar weakness narrative that has been another defining thread in the forex markets through Q1. After the Fed cut its blue dots forecast for interest rates hikes in 2016 from four to two, the greenback has retreated from multi-year highs against most of its G-10 peers, the exception being sterling as the fears of Brexit weigh on the pound.

Currency Wars

Herculean efforts by central banks are viewed by some as just another version of the kind of competitive devaluations that describe the currency wars.

There is little doubt that part of the whole Abenomics mantra has been the desire to crush the yen to boost the competitiveness of Japan’s export-led economy. It’s no coincidence that the yen has tended to move inversely to Japanese equities in recent years and the collapse in the Nikkei this year seems to neatly mirror the rise in the yen.

Shinzo Abe, the Japanese prime minister, stoked the yen fire even more when he told the Wall Street Journal recently that countries should not be engaging in devaluations.

Just to keep markets on their toes, his finance minister, Taro Aso, subsequently weighed in by saying that strong yen movements are less than optimum. Intervention bets have risen, but for now net long positions in the yen are at unusually high levels, according to data from the US Commodity Futures Trading Commission (CFTC).

BoJ Watch

All eyes are now on the BoJ in the run-up to its monetary policy meeting later in April. Economists are split over what action the bank will take, if any. Credibility is stake: with the yen now back where it started in October 2014, markets are questioning what weapons are left to deploy.

NIRP has so far not delivered, but if the recent history of central bank intervention is any guide, past performance won’t necessarily deter more of the same.