Photo: High Frequency Economics
The return of an extremely dovish Prime Minister of Japan has caused the yen to tumble for weeks.However, not everyone is convinced that Japan’s leaders will put their money where their mouth is.
High Frequency Economics’ Carl Weinberg thinks the idea that Japan will deliberately devalue the Yen is absurd:
“Huffing and puffing is all governments can do to cheapen their currencies. Indeed, that is all we believe they are really doing. We see no evidence of central bank intervention in the markets on behalf of governments. This does not make for every competitive devaluation, eh?”
So why is the Yen getting slammed? Even though they’re not directly manipulating their currency, it doesn’t mean that Japan’s leaders aren’t hoping for a cheaper yen.
“Everyone in Japan, from the prime minister down, denies that they are acting to cause the yen to cheapen. Meanwhile, traders take one look at Prime Minister Abe-san’s plans for more extensive quantities easing and they want to sell the yen like mad. This is a knee-jerk reaction that has no basis in the realities of QE.
Students of Japan’s exchange rate and central banking history know that the BoJ has been furiously buying government bonds for almost two decades. The whole time the yen has been appreciating, not depreciating.”
This is why this trend toward devaluation just can’t last, according to Weinberg.
“We view the yen’s recent depreciation as a technical consolidation from a rally that started at ¥ back in 2007 and peaked near ¥76 in November last year. We do not see the move as the start of a sustained downtrend.
Technicians are looking at ¥94.19—this morning’s level—as an important resistance point to the yen’s correction of a five-year sustained rally. The yen may just stop falling at this level because everyone agrees that it should. If so, technicians would look for a resumption of the currency’s overall appreciation.”
The exchange rate is a result of market action, not a policy tool, said Weinberg. “We think the yen’s next protracted move will be stronger from present levels, not cheaper.”