As $/Yen exchange rate slowly, but as surely as the Geiger counter ticking through 80.00 and toward its all-time record in 79-handle - one pauses and contemplates: is this supposed to be real or surreal?

Here you have a liquid, instantly tradeable 24-hour instrument, which may allow as much as 100:1 leverage to those who qualify and wish to indulge. You have country plagued by apparently irreversible demographic deterioration, now hit with quite a real prospect of not wanting any new pregnancy for decades to come, period. Its Central Bank can, is and will print this currency in perpetuity. Am I wrong in assumption that the only current bidders for Yen are Japanese multinationals, that must temporarily curtail their offshore enterprises in favor of domestic operations? And no one else…

Kim Zussman writes:

A biblical flood:  so much money it flows even where it doesn't belong.

Nigel Davies writes:

 If Japan needs to spend a lot on reconstruction whilst having little power to export then surely a strong yen makes sense.

Tyler McClellan writes:

It's not relevant to what you guys are talking about,

but of course the truth is precisely the opposite. To the extent Japan needs to get real resources from the rest of the world and can offer fewer real resources as recompense, it ought to offer a greater real share on its future production (which of course can be brought about by having a weaker currency).This is all just water on the bridge, but at least provides a reasonable basis for the conventional idea that the currency should weaken.

But these economic flows arguments are dominated by the change in the relative stock affects. There is a preponderant group of people who want to exchange a stock of dollar denominated assets for yen denominated assets. For purposes of this example, it doesn't matter that they dont know in which form to hold these yen assets (certainly not in stocks).

There is a meal for a lifetime here, but it is a complex one. It has to do with this observation, what does it mean for a given type of assets to be priced as the marginal equilibrium between buying and selling? Does this sensitivity to various changes of marginal preferences say something about the assets class and how partial equilibrium is achieved?

Perhaps I'm being not being clear enough, for the foreigner who happened to hold his worth in indeterminant yen assets, this constellation of events has been perfect. Why should that be the case?





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1 Comment so far

  1. Rohit on March 17, 2011 4:18 pm

    The strengthening of the Yen due to repatriation by Japanese people and corporations could be forcing leveraged funds, invested the the carry trade, to unwind (resulting in the sharp move in the Yen).


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