Ostensibly, there appeared little excitement to whet the appetites of yen traders throughout May. The yen was locked in tight ranges against various other currencies, and, not surprisingly, implied volatility started to trend lower. One-month vol, which was being quoted at around 19% at the end of March, had eased off to below 14% near the end of May. Other currencies were clearly moving around to a greater extent. But even if the yen was becalmed there was enough news flow to suggest that activity could pick up.
At the time of writing, the yen had easily shrugged off a series of negative pieces of news. On May 18, the currency came under initial pressure after Moody’s downgraded Japan’s foreign-currency debt from Aaa to Aa2. However, in this era of relative devalue trading, the yen soon regained its poise. The fact that Moody’s also saw fit to upgrade Japan’s long-term local-currency debt to Aa2 from Aa3 left, in the words of Bank of Tokyo Mitsubishi UFJ, "many Japan watchers nonplussed... For JGB holders as a whole, this should be a positive development, given that net external debt only totals 12% of GDP." Perhaps importantly, Bank of Tokyo Mitsubishi UFJ highlighted the fact that Moody’s had made the "connection between Japan’s considerable savings surpluses, which have allowed the government to ensure smooth domestic absorption of new issues".