OVERNIGHT

If you ever had a yo-yo as a kid, you have some idea of what's going on in the Nikkei: the dollar firms, stock prices rise. It weakens and shares sell off.

That's about as plain of a beggar thy neighbor play there is, though many will deny such shenanigans ever go on. Meanwhile, the dollar strengthened overnight pushing the yen lower and the Nikkei higher to a 1-1/2 week high Tuesday among investor jitters about upcoming earnings reports and future forecasts.

The Nikkei gained 1.2 percent to 16,412.88 by midmorning, the highest since Apr. 28. As expected to round out the theme, exporters led the market higher with the three major auto manufacturers, Toyota, Honds and Nissan, all advancing. One high flier was Asahi glass, up 8.5% after reporting nearly a 5% rise in operating profits.

The dollar settled at 108.29 after it strong Monday performance. That followed the yen's run sat week when it hit a 1-1/2 year high. Meanwhile, things heated up after the U.S. last week announced terms to prevent the Bank of Japan from intervening in currency markets to weaken the yen. The WSJ reported the following within the last hour:

TOKYO—Japan’s finance minister said he was “prepared to undertake intervention” in the foreign exchange market if the yen rose further and sharply, describing more explicitly than before a policy the U.S. opposes.

The comment by Taro Aso in parliament on Monday was his first direct reference to the possibility of intervention during his tenure as finance minister under Prime Minister Shinzo Abe.

Mr. Aso’s remarks added to signs of tension between the U.S. and Japan over exchange rates as both countries struggle to gain traction in the face of slowing global growth. Gains in the yen are generally a blow to Japan’s exporters, making them less competitive than their rivals in the U.S.

The comments helped push the dollar up about 1.2% against the yen to ¥108.38 in late afternoon New York trading, paring part of the dollar’s 11% fall against the currency this year through Friday.

The finance minister also broke from the protocol of keeping currency negotiations between countries under wraps to avoid feeding undue speculation. Mr. Aso disclosed how Japan’s Ministry of Finance and the U.S. Treasury Department have been at odds in private conversations over the yen’s recent appreciation.
But U.S. Treasury officials think differently, Mr. Aso said. “Their stance is that it [the rise in the yen] is still only ¥5, and we are not at a stage yet” to worry about currencies, Mr. Aso said. “We have often been arguing over the phone.”

In its semiannual currency report issued at the end of April, the U.S. Treasury placed Japan on a list of trading partners whose exchange-rate policies need monitoring. Japan has met two of the three criteria used by the department to identify a country pursuing policy that “could give it an unfair competitive advantage” against the U.S.

Investors interpreted Japan’s inclusion in the list as a U.S. call against intervention, but Mr. Aso said it was due to Japan’s trade surplus and didn’t mean the U.S. found Tokyo’s currency policy inappropriate.

Mr. Aso said the recent volatility in the yen was “not desirable” because it affects all government policy, from trade to economics to fiscal measures. “We are certainly prepared to undertake intervention” if the yen continues to make sharp movements, Mr. Aso said.

Intervention is an attempt by authorities to control exchange rates by trading their own currency in open markets. Japan last intervened in the fall of 2011, when the dollar was around 75 yen. It currently is about ¥107.50.

Mr. Aso also said the Treasury’s move to put Japan on a monitoring list “won’t constrain” Tokyo’s currency policy.Bank of Japan Deputy Governor Kikuo Iwata, also speaking in parliament, said the Treasury report wouldn’t affect the central bank’s monetary policy.

We said a private deal was recently cut to weaken the dollar and we will stand by that assertion until we see evidence to the contrary. So as more nerves get frayed we're likely get a further glimpse of the truth.