A Japanese 10,000 Yen bank note is displayed at the currency museum of the Bank of Japan in Tokyo January 15, 2013. Bank of Japan Governor Masaaki Shirakawa said the central bank will continue with powerful monetary easing as the economy is likely to remain weak for the time being, hardening market expectations that it will expand stimulus again this month. REUTERS/Kim Kyung-Hoon (JAPAN - Tags: BUSINESS)

Emma Charlton Bloomberg

The yen headed yesterday for its biggest two-day gain against the dollar since May after its 5.3 percent drop in the past month prompted global policymakers to step up criticism of excessive exchange rate moves.

Japan’s currency rose at least 0.2 percent versus all of its 16 major peers yesterday, climbing most against the Korean won as demand for higher-yielding assets waned. A measure of volatility increased to a four-month high as Russia’s central bank said the world’s leading economies were on the brink of a “currency war”.

Europe’s shared unit erased a decline against the dollar after a European Central Bank (ECB) policymaker said the exchange rate was not a concern.

“People are looking at the policy reaction of Japan and it was always likely that there would be counter-attacks by central banks to adverse moves in currencies,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland in London. “I doubt it is a coincidence that European policymakers have started to mention the euro, given the move we’ve seen against the yen.”

The yen advanced 0.6 percent to ¥88.26 a dollar in early trade in New York yesterday, following a 0.8 percent jump on Tuesday. That is the steepest back-to-back gain since May 31. The Japanese unit reached ¥89.67 a dollar on Monday, the weakest level since June 2010. It gained 0.5 percent to ¥117.50 a euro yesterday.

The euro was little changed at $1.3315 after erasing a 0.3 percent drop. It fell 0.6 percent on Tuesday, when Luxembourg Prime Minister Jean-Claude Juncker said the exchange rate was “dangerously high”.

“Japan is weakening the yen and other countries may follow,” Bank Rossii first deputy chairman Alexei Ulyukayev said in Moscow yesterday. Reciprocal devaluations would hurt the global economy, he added.

The yen tumbled 5.9 percent over the past month, making it the biggest decliner among 10 developed-market currencies tracked by Bloomberg, amid speculation the central bank will step up measures to boost the economy that may weaken the unit. The dollar was little changed and the euro climbed 1.3 percent.

The euro’s advance posed a fresh threat to the European economy just as it showed signs of escaping the debt crisis, Juncker said on Tuesday. “The euro zone has become more stable after lots of efforts, some from me.”

Policymakers across the world’s leading economies are advocating weaker currencies as a way to boost economic growth. Switzerland capped the franc’s appreciation against the euro at Sf1.20 (about R11) in 2011, while newly elected Japanese Prime Minister Shinzo Abe’s campaign to spur growth and seek a more aggressive central bank has driven down the yen.

The franc strengthened for the first time in five days against the euro yesterday, adding 0.2 percent to Sf1.2371. It climbed 0.3 percent to 92.94 centimes a dollar.

“Although fitting with the developing currency wars theme, for two reasons we would suggest markets may have overreacted to Juncker’s remarks,” said Adam Cole, the head of forex strategy at Royal Bank of Canada in London. “First, there is no evidence that Juncker’s concerns are shared by the ECB. Second, Juncker’s views are of limited relevance anyway as he is due to step down as Eurogroup chairman at the end of this month.”

Ewald Nowotny, a member of the ECB governing council, said the exchange rate of the euro against the dollar was not a concern for him and he did not expect the currency to keep appreciating in the longer term.

“One shouldn’t overvalue short-term fluctuations of exchange rates,” Nowotny said in Vienna yesterday. “I don’t see a perspective of a longer-term trend, therefore it is from my point of view not a matter of major concern.”

Currency volatility rose to a four-month high yesterday. The JPMorgan G7 volatility index, derived from premiums on forex options, rose to as much as 8.53 points, the most since September 6 last year. It fell to 7.06 points on December 18, the lowest since August 2007.

Nissan chief executive Carlos Ghosn said the yen’s recent declines were insufficient for Japan’s second-largest car maker to reconsider plans to scale back on its reliance on Japan.

“We don’t want to be a victim, or captive or prisoner, of exchange rates,” Ghosn said this week. “We want to decrease our dependence on the yen, no matter what.”

The “neutral territory” of the yen should be about ¥100 to the dollar, Ghosn added.