Japanese purchases of foreign bonds to weaken the yen may become more likely as the nation rejects trading partners' rights to criticize its currency policies.

“Foreign countries have no right to lecture us,” Finance Minister Taro Aso told reporters at a briefing in Tokyo on Dec. 28. He said that the U.S. should have a stronger dollar and questioned whether major Group of 20 nations had stuck to pledges from 2009 to avoid competitive currency devaluations.

Japan's new Prime Minister Shinzo Abe may accept trade friction as a cost of spurring growth and countering deflation through a looser monetary policy and weaker yen. The currency is set to complete its biggest annual decline in seven years after Abe's Liberal Democratic Party secured a landslide victory in this month's lower-house election. During his campaign, Abe said foreign-bond purchases were a possible monetary tool.

“The LDP wants to boost stock prices before the upper- house election in July next year, and the easiest option for them is to weaken the currency,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan's second-biggest bank by market value. “The explicit policy to weaken the yen is likely to upset the U.S. and China.”

Eoin Treacy's view Japan tolerated the strength of the Yen for a number of years even as its major trade partners proactively devalued their respective currencies through various forms of quantitative easing. The events of the last few months indicate it is no longer willing to tolerate this situation and we can anticipate that it will increasingly seek to justify its new position internationally as it proceeds to weaken the Yen.

The Deutsche Bank Yen Trade Weighted Index retested its peak, near 150, in July and has dropped to break the more than five-year progression of higher reaction lows. While oversold in the very short-term, a sustained move back above the 200-day MA, currently near 141, would be required to question medium-term scope for additional weakness.

As early as 2003, the Topix 2nd Section acted as a lead indicator for the wider stock market. It is therefore interesting, that this index posted a more than four-year high today. Following seven consecutive weeks to the upside, some consolidation is looking increasingly likely. However, as long as the devaluation of the Yen remains a credible program, the benefit of the doubt can be given to the upside over the medium-term.

The Atlantis Japan Growth Fund is denominated in Pounds, trades at a discount to NAV of 6% and tends to concentrate on smaller companies. It broke out to new five-year highs earlier this month and a sustained move below 82.75p would be required to question medium-term scope for additional upside.

JGB yields have exhibited a distinct progression of lower rally highs since 2006 and retested the 1998 lows near 0.75% in December. A rally is currently underway as the short-term oversold condition relative to the 200-day MA is unwound. However, a sustained move above 0.8% will be required to confirm supply dominance beyond the short term.

For reviews of Japanese shares Also see Comment of the Day on December 18th 2012 and November 15th 2012