Mar

25

Yen, from George Coyle

March 25, 2012 |

 I've been hearing a lot of recent JPY mentions these days. Yen seems to be taking a header. YTD post several years as a champion. What is the bear case? High Debt, Low Yields/Carry/Risk On, Zombie Banks, Relative "Value" in a crisis given preexisting low rates rolling off, poor demographics, export economy seeks a weak yen. Any major selling points I am missing? Is this move a head fake to be reversed in the next leg of the rolling brownout crises or a major trend reversal?

John Floyd responds: 

There are some many possible answers to your question encompassing multiple time frames and potential driving factors. But let me try to put some of this in perspective and at least attempt to ask the right questions.

In 1985 I arrived in Japan after 23.5 hours of travel, bought some JPY at the airport at 248.55, headed to Tokyo by bus and as I put my head down on the futon there was an earthquake tremor that shook the building. The next day I read the classifieds for an English teaching job and was hired within 2 hours for a $40 an hour cash paying job. My only qualification and employment test was that I spoke English and could read the equivalent of what amounted to be a 5th grade English story book. I met many nice students ranging from businessmen in Kawasaki to the actress who later became embroiled in some sheep-poodle issues. I soon thereafter also worked for an investment company during which my first day I was informed that any lunch would have to be preordered very early and any possibility of going out to lunch would have to be done by reserving hours or days in advance. Japan was booming, money was spent with excess, and the now aging demographic spectrum was 25 plus years younger.

Since that time in 1985 the JPY has appreciated versus the U.S. dollar to 75.35, the "bubble" burst in 1989, and Japan entered what has been two lost decades of a stagnant economy. In the past several months the BOJ has adopted an inflation target of 1%, the BOP's has shown further signs of shifting course, and further intervention by the MOF/BOJ to weaken the JPY by selling it in the open market was revealed. In the longer time frame many other factors are at play such as debt levels, demographics, ownership of the JGB market, macroeconomic shifts, etc.

The message of the markets and the message I take from the recent action is Japan's new experiment bears careful watching. The shift that may be occurring in the collective forces and thoughts in Japan is potentially a very powerful catalyst juxtaposed to the macroeconomic fundamentals. The potential for the JPY to reverse much of the gains versus the U.S. Dollar from 1985 bears careful consideration and potential opportunity.

 


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4 Comments so far

  1. Matthew on March 25, 2012 11:13 pm

    Mr. Kyle Bass put it well back in late 2011 when he stated that Japan spends around 50% of their budget servicing their debt. If/when rates rise 2% they are broke.

  2. Craig on March 26, 2012 1:28 pm

    USD/JPY downtrend has been steady since 2007, so breaking that trend was something new. Maybe it’s just a technical bounce though. Yen trend strength normally has strong long leading economic indicators for Japan and strong inflation indicators for the US. (I have positive growth rates for both.) That seems to be in place now and is bullish for yen.

  3. Craig on April 6, 2012 5:02 am

    Revisions just changed the improved setup for yen. Yet again shows the problem with using economic data for markets.

  4. Roger Tompkins on April 24, 2012 11:57 pm

    One could say the the USD/JPY downtrend has been in place since March 1990, the most recent extension of which began in May, 2007. As Craig said, it has been steady since then until it stopped and reversed at .76.

    I don’t see the bounce from there as purely technical. I do see the Japanese coming to understand what they must do to continue to survive as an exporting nation. Given their military is out of the picture they are a mild mannered people, unobtrusive, willing to please. However, they are wising up re: currency values.

    They’ve been most cautious in devaluing the yen. A move here and there. They’ve even asked permission in a couple of instances.

    On the other hand, they’ve watched the Swiss. The Swiss give a flying damn what anyone thinks about them. They are an exporting nation and intend to thrive as such indefinitely. They’ll print money as necessary to maintain the currency ratios seen as acceptable.

    Japan cannot help but be enlightened if not influenced.

    I’m long and looking for .85 within the near term and 1.00 down the line.

    Supporting this view is the fact that the US economy is slowly turning, rates will go up, and Japan is still fighting its everlasting deflation. Meantime, to the Japanese investor, our 10 year rate looks fabulous.

    I’m long the USD/JPY.

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