YESTERDAY, Moody’s threw a bombshell into the currency market by announcing that it could lower Japan’s Aa2 rating in the coming months. Dollar-yen jumped nearly 100 points as a result of the news, rising to a high of ¥81.80. In its note, the ratings agency cited “heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government’s ability to fashion and achieve a credible deficit reduction target.”

Japan’s debt is the largest in the industrialised world, standing at more than twice its GDP of $5 trillion (£3.03 trillion), and is likely to expand further in the wake of reconstruction efforts following the natural disasters in March. Analysts are worried that, with an ageing population, Japan will simply find its debt load unsustainable.

However, those concerns have been voiced many times before and, much to the consternation of yen bears, they have not come to pass. Japan continues to generate a surplus of capital and is therefore able to finance its fiscal deficits internally. Eventually, the demographics of the country and the exponential increase in its debt will catch up with its currency, but for now dollar-yen continues to trade primarily off interest rate differentials.

That’s why this week all eyes in the currency market will be focused on the US non-farm payrolls report due Friday at 1.30pm. Market consensus is for an increase of 194K, slightly lower than the prior month’s reading of 244K. However, if the number surprises to the upside it could provide further lift to dollar-yen. I believe that the Federal Reserve will need to see at least three consecutive 200K+ months of job growth in order to seriously consider a rate hike. If the US employment data proves robust for a second month running, the market will begin to price in the possibility of a US rate hike before the year end. That dynamic is likely to fuel a much more sustainable rally in dollar-yen than any ratings agency downgrade. If the US labour condition continues to show improvement, dollar-yen could test the ¥85.00 level as the summer progresses.