Shinzo Abe

Yen on the move, 27 month low – what is this telling us? As industrial output fell in November, demand for exports continues to slow and while consumer prices also dipped – it’s indicating that deflation continues to remain a hurdle in boosting Japanese domestic demand. Japan has been seeking to spur domestic demand to offset the decline in exports, which have fallen for six months in a row. This has sent the Yen to its lowest point against the Dollar, since September 2010. But is this really news? Why all of sudden this sharp move?

The major reason is the election of Japan’s new Prime Minister Shinzo Abe, who has promised steps to weaken the yen to help revive Japan’s sluggish economy. Mr Abe has also called upon the central bank to boost its stimulus measures and undertake aggressive monetary easing to spur economic growth. He has even suggested that Japan’s central bank should print “unlimited yen” to help stoke inflation. That includes setting an inflation target of 2% – double that of the Bank of Japan’s (BOJ) current target. Analysts have said that with Mr Abe’s Liberal Democratic Party and its coalition partner having a two-thirds majority in the lower house, it was highly likely that Mr Abe will be to implement the measures that he had promised during his election campaign. But this is not the only reason. Here is the list of reasons for the rise in the USD/YEN trade:

  1. Shinzo Abe – Japan’s new Prime Minister – as mentioned already.
  2. Japan’s trade situation also seems to be deteriorating (partly due to the China row). Whereas previously the country was running big, consistent trade surpluses, it’s now in steady trade deficit.
  3. The US economy is strengthening, giving tail wind to the trade.
  4. There’s is a belief that the endgame is in sight for the Fed, signaling potential higher interest rates and a higher Dollar against all currencies. Its a belief in the market, though I am not sure I agree.
  5. There’s is a belief that there is an end of the Eurozone crisis, push further down the Yen with the EUR/JPY trade. Again not sure this is true – but it is a market belief.
  6. Fear of war. Japan’s new PM Shinzo Abe, is likely to adopt an even more aggressive, militaristic stance towards China.
  7. Japan’s economy is bad, with the economic data in Japan deteriorating again.
  8. Momentum – Yen has been very range bound until now – once it breaks, traders will pile on and push it farther than it would normally go.
  9. And finally, to which I fear the most (more on this later), is a potential massive national debt Bond collapse. Some feel this is Yen negative – I would think the opposite – again a market belief.

This is a long list for a continuation of the USD/YEN trade to get to 90 and some more aggressive analysts are calling for as high as 98 by the end of 2013. I am not so sure. We all know that Japan has a debt to GDP ratio over 200%. Everyone has largely ignored this (unlike in the US and EU countries) because it is believed that most of this debt is owned by Japanese. But the threat of a Bond collapse is real – Japan can not continue to deficit spend forever. A Bond collapse will hurt mostly the Japanese. If this should happen, this takes money out of the system, thereby reducing money supply, raising interest rates, creating more deflation and could do the logical opposite of what one would think – send Yen sharply higher. Making the Yen Bond holders the big losers. However short term, the fear causes many to sell Yen.

What’s the point of this long story? The Japanese economic policies is exactly what the US is following. Trying to boost growth and fight deflation through Central Bank and government stimulus polices. To date the Japanese have not been successful, resulting in the Japanese working well into its second lost economic decade – the US is just completing its first. So we can watch the Japanese results and see the same later in the US results. An initial currency weakening and then a huge rebound when it collapses. The only issue for us traders is as always – timing. Happy New Year – be safe tonight !!!

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Blue Point Trading Market View – December 31, 2012

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