INTERVENTION COULD DERAIL THE YEN RALLY
By Walter Kurtz, Sober Look
The Eurozone crisis is putting upward pressure on the yen, with traders continuing to view it as a safe haven currency. Strong yen is making it increasingly difficult for Japan to compete in the global markets against nations like Germany who have a weak currency advantage.
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| USD/JPY (Bloomberg) |
Japan had a trade deficit in 2011, which is unheard of for that country in recent years. Some of that was clearly driven by the tsunami disaster. There is no question however that a strong yen was a contributor.
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| Japan trade balance (Bloomberg) |
In spite of the tremendously accommodating policy in 2011 including QE and zero rates, industrial production has been declining while equity and property markets are relatively weak. The environment looks deflationary, yet there are no more tools left in the BOJ’s monetary toolbox. Except for one, albeit a temporary measure. Japan can intervene in the currency markets again in order to weaken the yen and give its exporters some relief. This may in fact be BOJ’s next move.
Japan would likely want the US and the Eurozone to help them put in place a coordinated move. But neither of their two biggest trading partners has much of an incentive to do so. Nevertheless BOJ may go it alone and find a quiet day to try to punish everyone who has on a speculative long JPY position.
* Walter Kurtz is a credit specialist at a NYC hedge fund.
First, the BOJ doesnt make decisions on intervention. Thats entirely up to the MOF. He also misses the real factor behind the yens recent strength. Its Japanese investors doing the selling – in large part increasing their hedge ratios. Speculatos have been shoting yen recently and increased their shorts when the trade deficit started getting more attention.
Hi All, I’m still struggling to understand why US should be different from Japan. In japan, QE + zirp goes with deflation and Strong currency. Why should it go with inflation and $ debasing in the US? Any links on this subject would be appreciated.
Isn’t the real problem the unchecked Chinese juggernaut and the deliberate manipulation of the Renminbi to undervalue exports? I think that all the other issues are just symptoms. Everyone is trying to cope with the competition from China, and it seems that they are losing the battle.
Bolderdash !!! In the 2nd half of 2008 the yen appreciated against both the USD (modestly) and the EUR (significantly). And then there wasn’t a Eurozone crisis around. The Yen is used for the carry trade. Borrow Yen, sell the yen and buy/invest in EUR, USD(!), BRL, AUD, CAD etc. But this also means that the Yen will appreciate when this carry trade goes into reverse/is unwound.
An intervention would only delay the inevitable rise of the Yen. This is what I would call “”Mr. Market”".
A more serious development is that Japan is running the first Trade Deficit since 1980 (According to my info). It’s – IMO – only partially the result of “”Fukushima”". It’s more likely that the Trade Deficit is the result of a chinese economy “”cooling down”".
Japan invested heavily in steel production in the 1980s based on the assumption that their economy would continue to expand by about 6% per annum for ever. So, when the japanese bubble deflated after 1990 they started to export steel to (among others) China. But China has been expanding its steelproduction as well. (source: Hugh Hendry) With a chinese economy “”cooling down”" that japanese (steel) export must have taken a massive hit in recent weeks/months. And on top of that the yen starts to increase in value. Hence the Trade Deficit. And that – IMO – shows up in the dramatic development of the Baltic Dry Index lately, as well.
Just imagine what would happen when the japanese are running a Trade Deficit. Rising US interest rates, anyone ? Falling demand for US T-bonds, anyone ?
I would be worried if the EUR would weaken significantly even against e.g. BRL, CAD, AUD as well. Then that would be a REAL sign of a EUR crisis.