Talk Of Yen Intervention Makes Sense… But First Brexit
Quotable
“I have experienced failure as a politician and for that very reason, I am ready to give everything for Japan.”
Shinzo Abe
Commentary & Analysis
Talk of yen intervention makes sense…but first Brexit to deal with
Japanese industry is worried the yen strength will hurt its overseas sales.
The yen’s recent approach to ¥100 against the dollar has provoked speculation that the Ministry of Finance may be poised to intervene for the first time since 2011.
“We think the time to act has already arrived. It’s already ¥104, ¥105 to the dollar. It was ¥118 in January. From ¥118 to ¥104 — that’s ¥15 in six months,” said Mr [Sadayuki] Sakakibara [chairman of the powerful Keidanren business lobby].
“That is not orderly. Extremely disorderly is all you can call it. To keep it stable in a reasonable range then certainly the Ministry of Finance should act.”
Financial Times , 20 June 2016
It used to be no matter how strong the value of the Japanese yen, the country’s trade balance remained quite high; even despite attempts to punish Japan a la the the Plaza Accord [G-5 countries intervening back in September of 1985 to weaken the dollar against both the Japanese yen and Germany mark].
In the chart below I have overlaid the USD/JPY on top of the monthly Japanese Trade Balance going back to 1982. The yen weakened from a whopping 277 to the dollar during 1982 to just 84 yen per dollar by 1995. Yet, as said, Japan’s trade balance remained strong.
In the chart below, I have shifted the USD/JPY by 20 months into the future. As you can see, the correlation between the value of the yen and trade is seen more clearly.
The game changer of course was the credit crunch, which altered the supply and demand dynamics in the global economy in a very big way. As the yen strengthened on haven flow from around USD/JPY 123 to USD/JPY 77 in the midst of the credit crunch, Japan’s trade balance started consistently deteriorating.
Thus it was the beginning of the three-arrow strategy from Japanese PM Abe—the first arrow was intended to weaken the yen. And as you can see in the chart above (and below) it worked.
So, based on the correlation seen above, it seems in this new abnormal world where demand is not quite stagnant, but weak at best, Japanese industry seems right to be worried. It suggests calls for intervention may soon be acted upon.
However, I suspect Japan is keeping powder dry till after the Brexit vote. Because if the Brits decided they want sovereignty back, the yen likely would rally sharply again on haven flow, similar to what it did during the credit crunch, but in mini-fashion.
Next stop on haven flow to the yen is likely the 100 target many have discussed. It represents a 50% retracement from the low going back to November 2015—when the three-arrow strategy got underway. But after a move to 100, it would seem the potential pressure would be too much for Japan’s government—they would likely decide to step in with barrels blazing.
USD/JPY Monthly:
If the “remain” block wins the Brexit vote, either $-yen rallies (yen weakens) of its own accord and/or the government helps it along; that seems the consensus bet. But Mr. Market is likely to be particularly tricky in here so any confidence in the consensus should remain limited.
Futures, Forex and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance ...
more
Japan and the yen bet is a funny case of backwards logic. While people worry about Japan reaching a debt point where n no one in their right mind would lend them more, this thought has entered into the notion of those playing its currency with reverse effect. Everyone knows its unsustainable and cutting or even stopping issuing more will be devastating to the economy. However, knowing it's unsustainable, means that they should reach a point they will have to cut back making the Yen soar and the economy tank.
Given their already horrific debt and negative rates which is looking like it shrinks the economy rather than grows it, this is a fair assumption to make and is disastrous for Japan who has engaged in absurd economic games for decades rather than allowing a free market to fix its ailing economy. The simple fact is Japan is reaching its debt load where there will no longer be more money, but potentially even less money in your lifetime. How Japan can borrow given this will make debtors broke is a good question. The best argument to make is, don't follow Japan into socialistic runaway debt sprees that never end.
To add to that, don't go ultra low rates to negative rates. It kills growth and distorts the economy. It does nothing to fix things and only makes things worse in the long run. Sadly the US is already finding this fact out all too slowly. Our central bank is single handedly running America into the ground.