What's up with the value of the YEN?

[Catoneinutica]

Interesting discussion over at The Atlantic:

http://meganmcardle.theatlantic.com/archives/2009/02/japans_economy_goes_from_doldr.php

[FG Lurker]

Japan's Credit-Default Swaps Signal Yen May Lose Haven Status
Bloomberg, February 19, 2009

The rising cost to protect buyers of Japan's sovereign bonds against default signals the yen may start to lose its status as a "haven" currency, said Barclays Capital, the world's third-largest foreign-exchange trader.

[...]

'Definitely Overvalued'

Japan's currency fell 1.8 percent this week as the world's second-largest economy shrank 3.3 percent in the fourth quarter from the previous three months. That compares with the U.S.'s 1 percent contraction and the 1.5 percent decline for the 16 nations that share the euro.

"The yen is definitely overvalued, which has weighed on the Japanese economy, producing the worst contraction since the oil shock in 1974," said Mickael Benhaim, who manages about $32 billion as head of global bonds at Pictet & Cie Banquiers in Geneva.

(Full Story)

This article seems to have caused the yen to start to move. 94.3/US$ as I write this, and 120.31/Euro. About f'ing time!

[Mulboyne]

This article seems to have caused the yen to start to move. 94.3/US$ as I write this, and 120.31/Euro. About f'ing time!

[omae mona]

Just busted through back into the 95 range a few minutes ago. Actually hit 95.20 for a moment. We haven't seen 95 numbers since late November!

[canman]

But the Nikkei is still in the shitter. I thought for sure once the dollar began to rise the Nikkei would go with it. I made a bunch of purchases while the dollar was at 89, and bought C dollars at 79, looking good now.

[IkemenTommy]

Just busted through back into the 95 range a few minutes ago. Actually hit 95.20 for a moment. We haven't seen 95 numbers since late November!

Woo hooh! The economy is smelling like roses now.

[Mulboyne]

Here's another chart produced by KBC which shows the seasonally adjusted trade balance against the yen/dollar rate lagged by twelve months. (Please don't buy or sell the yen because you think I know which way it's going. I haven't a clue).

[omae mona]

[FG Lurker]

I would be so happy if the yen crossed 100/dollar, even if it settled around 105 without going to 100-115 range. Hell, I'm damn happy with where it is right now! I can actually make a bit of profit again now, unlike when it was sub-90.

[nottu]

[Cyka UchuuJin]

it figures that one week after i give official notice to vacate my apartment because it's costing too damn much, the yen starts to head towards 100.

[Greji]

it figures that one week after i give official notice to vacate my apartment because it's costing too damn much, the yen starts to head towards 100.

You can stay in mine if you bring some of those hot Kenyan goats.....

[IkemenTommy]

You can stay in mine if you bring some of those hot Kenyan goats.....

Can I stay at your place if I brought goats?

[Greji]

Can I stay at your place if I brought goats?

Whatta you think I'm gay or something?

Ahhh, What kind of goats are we talking about?

[Cyka UchuuJin]

You can stay in mine if you bring some of those hot Kenyan goats.....

i've been trying, but they don't grant visas to goats.

[Greji]

i've been trying, but they don't grant visas to goats.

I called KIX and they told me that goats are okay, it's just Russians they like to check closely.....

[Buraku]

I wouldn't beat myself up over it CykaUchuuJin, you did the right thing. The yen was stuck on a low 90 and diving towards 80 and even 70 levels. Moving place to save yourself some money was a smart thing to do. How were you to know Nakagawa would turn up in Rome totally shitfaced drunk and sabotage the Geppy and Gophers? It will reverse soon enough, Obama's bailouts and stimulus has the Fed running the printing press overtime (US currency devaluation soon?) and the LDP biased J-cops are carrying out a character assassination on Ozawa. Give it a few more months, you will realize you did exactly the right thing.

[FG Lurker]

FOREX-Dollar up vs yen on stocks, Japan official's comments
Reuters, May 18, 2009

The dollar rose against the yen on Monday as a rally in stocks revived risk appetite and comments from a Japanese official spurred speculation authorities in Japan may intervene to slow its currency's rise.

[...]

The yen retreated from a two-month high near 94.50 to the dollar and slid versus other currencies. Japan's vice finance minister, Kazuyuki Sugimoto, said he was watching foreign exchange market moves carefully, and he hoped they would not have a negative effect on the economy.

[...]

But analysts said while Japanese officials may step up efforts to slow the yen's rise, which hurts the country's exports, any action beyond verbal intervention is seen as unlikely.

(Full Story)

With the election drawing ever closer I am hopeful the gov't will finally step in to push the yen back towards the 105-110 range. (Considering the horrific condition of the j-economy and the high national debt it should probably be a lot weaker than that.)

[AlbertSiegel]

Went to 88! When will this end? FG Lurker, how are you holding up? I would love to visit, but not going to happen with this exchange rate.

[FG Lurker]

Went to 88! When will this end? FG Lurker, how are you holding up?

My head is above water this time around as I reworked my business after this happened last year. That said, it's definitely getting ugly. I can do okay with the yen around 95 and can survive as low as 90ish where it is now, but any lower and things really stop working. At 80 I may as well not bother even trying, there would be no market for my products. I think most businesses based around exports would have the same sorts of things to say.

I've started working on plans for a business I will run out of Hong Kong that is not at all dependent on the Japanese economy or the strength/weakness of the yen. Tremendous amount of work before any income will start flowing from it but it will be worth it in the end. Feels good to know that sometime next year I'll be flipping the bird at the Japanese corporate tax structure too!

[IkemenTommy]

The sudden dip was apparently caused by an idiotic statement within the Hatoyama administration.
Ikemen transferred about JPY150,000 of "playing cash" the other day to make some quick return.

[FG Lurker]

The sudden dip was apparently caused by an idiotic statement within the Hatoyama administration.
Ikemen transferred about JPY150,000 of "playing cash" the other day to make some quick return.

I think the DPJ is still getting used to the idea that people actually listen to what they say... Big difference between being opposition and actually being in power.

If they actually do allow the yen to continue to appreciate the results are going to be quite interesting. There will be less and less manufacturing done here -- manufacturers will either move offshore or go belly up. What is going to replace those jobs? McDs? 7-11? Great, 800yen/hour. The increased purchasing power of a stronger yen isn't going to mean much if large chunks of the population are earning 1/3 or 1/4 of what they were in manufacturing jobs. Also not sure how they see this reduced income encouraging people to have larger families...

[nottu]

[FG Lurker]

What are we talking about here - Japan or Cleveland?
The short term (meaning Now) on the USD/Yen is $ down, but before you get all worked up you should ask yourself the question - Which country, US or Japan, has the more robust economy and better intermediate economic future?
Then place your currency bets.

I don't think there is much doubt that the US has a better intermediate to long term economic future than Japan. I'd say the US has a better future than the UK too though and the pound has been stronger than the dollar for much longer than I have been alive (has the GBP ever actually been weaker than the USD?). If the DPJ is determined to have a stronger yen then I think it is possible for them to make that happen. I don't think it would be smart, but much like "military intelligence" using "smart" and "government" too close together only makes for sad comedy most of the time.

[nottu]

[FG Lurker]

Well the reason I posed the economic rhetorical question is because economies drive currencies. So although things right now look bad for the US$ I wouldn't get too worried - the US machine will be kicking ass again and the dollar will strengthen. IMO, the Yen has to decline - its just a matter of time.

I agree that economies *should* drive currencies, but if the recent crisis has taught me anything it is that economies don't always drive currencies.

Japan has a GDP/national debt ratio approaching 200%, a looming unfunded pension disaster, an aging and shrinking population, no immigration, a populace that prefers saving over spending, a new government that has stated they don't think the current ~180% debt ratio is too high, and probably a few other problems that I have missed. Oh, and even though the Japanese economy didn't experience the massive boom that happened in the US it has been one of the hardest hit over the past 12 months. Yet for some reason the markets have deemed the JPY a "safe haven currency." It's bullshit as far as I am concerned, but it's what has happened. How long will it take for the markets to change this view? Will they? Who knows?

To paraphrase Keynes, the markets can remain illogical longer than I can remain solvent. I'm not abandoning my export business but I intend to ramp something else up beside it that I think will eventually grow much larger than the export business I currently have. I also plan to build the new business in such a way as to make it much less dependent on the fluctuations of a single economy or currency...

[nottu]

[FG Lurker]

No matter what business I am in, as long as I am living in Japan and earning money in dollars, euros, or pounds, having a weak yen is beneficial for me. So from a purely personal standpoint I certainly hope that the yen does weaken, and I agree that it should... I'm just less certain that it will, and if it does how long that will take.

[Ketou]

To paraphrase Keynes, the markets can remain illogical longer than I can remain solvent.

That is so true....the dollar sinking into a pit of shit as the yen strengthens is really hurting.

[FG Lurker]

Japanese Politics and the Yen
Axel Merk, October 1, 2009

The U.S. dollar has been getting a beating from all sides, but its woes may be far from over -- recent developments in Japan, China, Germany and the United Kingdom, not to speak of domestic developments in the U.S., are pointing to a rocky road ahead. Today's focus is on Japan and, more specifically, how a country on a downward economic spiral can have a strong currency.

Exchange rates are subject to the forces of supply and demand -- the flow of funds -- of the underlying currencies. While conventional wisdom dictates that a growing economy may attract more foreign investment, a better gauge may be to look at a country's dependence on foreign investment. A country like the U.S., with a severe current account deficit, depends on foreigners buying about $2 billion worth of U.S. denominated assets every single day just to keep the currency stable. The current account deficit reflects a country's trade deficit plus any financing requirements, such as government spending that is financed from foreigners rather than domestically. The currencies of countries with significant current account deficits, such as the U.S., Australia and New Zealand, tend to be more volatile during periods when market participants do not have a clear view on whether the economies will experience growth or not.

However, the Japanese economy is less sensitive to capital flows from abroad; instead, if market forces were allowed to play out, frightened Japanese consumers might even save more as their economy continues on its downward spiral. The Japanese yen may perform better the less effective the government is: as the former Japanese government's leadership became ineffective and the Bank of Japan received no instructions to intervene in the currency markets, the yen was able to rise.

[...]

Does it mean all is well in Japan and Europe? No. Quite the contrary, but flow-of-funds issues are more relevant to short and medium term valuation dynamics than challenges in a country's balance sheet. In the case of Europe, the banking sector has major challenges still ahead, but the European Central Bank's approach of providing unlimited liquidity to the sector is likely to keep zombie banks alive; that bodes badly for economic growth, but can support a strong currency. In Japan, the massive government debt is a long-term issue that will become a short-term issue when financing issues arise. In a world where the Japanese banking system is perceived to be one of the safest in the world (what a scary thought!), and the market appears pre-occupied with only the most imminent financial issues, these problems, at least for now, appear to be in the distant future.

[...]

When the yen started to rise in the days after DPJ's election victory, politicians boasted how this would strengthen domestic purchasing power for consumers. Well, it does, but it also hurts exports. Japan is traditionally one of the world's best exporters and has the world's worst consumers. While it is laudable that a government wants to strengthen consumer's purchasing power, the question is whether the government truly has the willpower to pursue this policy.

From what we can see, the government stayed on course for about a week. When it comes to analyzing developing countries' currencies, what makes our job traditionally quite easy is how predictable policy makers are. Not so in Japan. The new Japanese government has an array of ideas, but -- in our humble opinion -- not a clue of what they are getting themselves into. Since the election, the government has:

• stated a strong yen is in Japan's interest;
• stated the exchange rate should be set by market forces;
• denied it said it wants to have a strong yen; and
• threatened to intervene should the yen hurt the economy.

All of this within less than two weeks; so much for consistency of policies. Why do we care about the attitude of politicians with regard to the exchange rate? Because it is a great deal easier to weaken a currency through intervention than to strengthen it.

In the meantime, the markets are not waiting until the new government makes up its mind. One of the consequences of a less predictable policy environment is that speculators are staying away from funding their bets using yen. Commonly referred to as the carry trade, speculators have in the past borrowed money cheaply in yen, then sold the yen to buy higher yielding assets elsewhere. As the credit crisis erupted, the carry trade was largely unwound, causing the yen to rise. Thinking about it another way, the Japanese are one of the largest international investors, and when they got spooked and wanted to hide all their hard-earned cash under the mattress like everyone else, where did they get there money from? Well, they had to pull it out of international markets and back into the yen, putting upward pressure on the yen in the process.

However, now as the world is once again awash in money, the yen is no longer the preferred funding currency for speculators. Instead, the U.S. dollar seems to be taking its place. Given that U.S. policies seem more predictable -- a determination to print and spend money, as well as a commitment to keep interest rates low for a considerable time -- speculators have more confidence to borrow cheaply in U.S. dollars, and then sell those U.S. dollars to buy higher yielding assets elsewhere.

On a short-term basis, the yen may have benefited from the hope that the new government will help induce domestic economic growth, while reducing the risk of currency intervention. After all, it is marginal demand that pushes a currency higher or lower. To round out factors affecting the yen in the short-term, Japan has also allowed the tax-free repatriation of profits earned abroad by corporations, giving the yen a short-term, but non-lasting boost.

What do we make of all of this? While the new Japanese government is settling in, aside from some short-term profit taking, the yen may continue to benefit despite a continued downward economic spiral. However, the yen may be becoming an increasingly risky proposition because of the unpredictability of Japanese policies and potential Bank of Japan intervention. The yen is likely to continue to be considered a safe haven during times of crisis. And while that's a topic for a different analysis, we do not think the global financial crisis is over and there may be funding issues in the weeks and months ahead. In case you are not confused, you have not paid attention. But that's the nature of trying to understand the dynamics in Japan and that's why Goldman Sachs suggests the yen should be trading closer to 200 to the dollar, while we would not be surprised if the yen strengthened to 85 or even 80 should market forces be allowed to play out. Instead, we can be assured that policy makers will do their best to keep everyone confused -- including themselves. The result is likely to be an array of policies that may ultimately be very expensive.

The good news is that other regions in the world are -- in our assessment -- far more predictable. In our upcoming newsletters, we will focus on Germany, the United Kingdom and China.

(Full Story)

Although somewhat convoluted (even after removing large chunks!) this is the best explanation I have seen yet as to why the yen is so strong right now, even though Japan is so fucked. The key points I take are:

• The percentage of foreign investment in Japan's economy is relatively small so the JPY doesn't weaken from foreign investors panicking and selling yen-denominated investments.
• On the contrary, when panic hits Japanese sell their foreign investments and repatriate funds which pushes up the yen even more.
• The foreign perception is that Japanese banks are very strong. (:shock:)
• The long term issues which should weigh heavily on the yen are not. Most investors are not looking that far down the road when there are so many more immediate problems to deal with.
• In the more recent term there has been a boost to the yen from the corporate profit repatriation tax law.
• The lack of clear direction from the Japanese government has kept speculators away from using the JPY as a funding source for carry trade investments.

It looks like we are stuck with a strong yen for awhile yet.