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Despite running a gigantic national debt, the Japanese yen has for a long time been one of the strongest currencies in the world, confounding bears, and frustrating domestic manufacturers who have felt that the strong currency was hobbling business.But the US dollar has snuck up to a 7-month high against the yen, and everyone is talking about a big leg down.
An election is coming up in December, and Liberal Democratic Party candidate Shinzo Abe is running on a platform of aggressive easing. Everyone is talking about it.
Dave Lutz of Stifel, Nicolaus noted one of the topics he was talking about with clients today:
Japanese shares outperformed as the opposition party cements its lead in the polls ahead of next month’s election. – The Nikkei gained more than 4 per cent last week after Shinzo Abe, leader of the opposition Liberal Democratic party, called for “unlimited” monetary easing.
Jim O’Neill of Goldman talked about it in his weekly note:
Which brings me finally to my theme, and I will be brief. From the Plaza Accord of September 1985 all the way until I joined GS in the Autumn of 1995, I was bullish Yen, and after a brief shift to being temporarily US$ bullish, I returned to being a Yen bull from 1997 until a few years ago. I was quite chuffed with myself for understanding the Yen and it was based on pretty simple stuff, Japan’s persistent and strong balance of payments, especially its trade and current account surplus, and its associated rising equilibrium exchange rate.
All of this has reversed and recently, Japan was reported its first ever current account deficit, or certainly, its first for many decades. They have a very overvalued exchange rate, a collapsing export sector, an unreformed domestic economy, a debt challenge that makes Greece’s seem easy to solve, a central bank that doesn’t try too hard – currently – to reach its inflation target and, once again, a very weak economy. And that is without even getting into the complex issues of its relationship with China and other Asian countries, that in principle should be as good for them as those countries are for the rest of us. Anyhow, we may soon see a general election and a return of the LPD, whose probable Prime Minister has told us now 3 times in the last fortnight that he would force the BOJ, if necessary, to pursue a 3% inflation target. This is the sort of thing that many were advising Japan from overseas in the mid to late 90’s when so many people mistakenly lost of lot of money betting against the Yen. Go get all those guys out of retirement as the time has probably come. The outlook for the Yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there. I have been getting more and more negative about the Yen for the past couple of years, and I have, so far, been wrong, but it seems more and more obvious to me, that the moment is here.
For long-suffering bears on the yen, redemption is looking more likely if options are any guide.
After appreciating more than 60 per cent between July 2007 and June of this year, the yen has tumbled almost 10 per cent against a basket of developed-market currencies, including a drop of 2.2 per cent last week, data compiled by Bloomberg show. Option traders are paying record premiums to protect against further depreciation as Prime Minister Yoshihiko Noda calls for elections next month. The yen slid to the lowest in almost seven months today.
Polls signal the main opposition Liberal Democratic Party will win elections on Dec. 16, led by Shinzo Abe who last week called for the Bank of Japan (8301) to pursue unlimited bond purchases and zero-to-negative interest rates. BOJ Governor Masaaki Shirakawa is due to step down in April after a five-year term.
Watch this space. An election. A possible aggressive change to Bank of Japan policy. The breaking of a big trend in the currency. A Nikkei rally. Will be interesting.
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