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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