Earlier we joked that lost in all of the Fiscal Cliff shuffle was the fact that the yen has been getting clobbered.
SocGen’s FX guru Kit Juckes jokingly responded that far from getting “lost” the yen carnage was actually the only game in town.
“@thestalwart: Lost in all this Fiscal Cliff chazerai is USDJPY above 86″ lost? This is the only real thing that’s happening this week.
— kit juckes (@kitjuckes) December 27, 2012
Indeed this is really the huge story in global markets right now. In addition to being a major shift in one of the world’s biggest and strongest currencies, it affects all sorts of manufacturers who do business in yen, or compete with companies that do business in yen.
Here’s a three-year chart of the CurrencyShares Japanese Yen Trust, an ETF that’s designed to track the yen. As you can see, it’s been collapsing, and is now at a level that hasn’t been seen in over two years.
So what’s causing the yen carnage?
There’s actually no one thing.
But a few of them are:
— Shinzo Abe: Japan’s new Prime Minister (who took office yesterday) has pledged to force the Bank of Japan into ultra-easy monetary policy, and he’s even favoured bond purchases for the direct purpose of funding stimulus money.
— Japan’s trade situation also seems to be deteriorating. Whereas previously the country was running big, consistent trade surpluses, it’s now in steady trade deficit.
— The US economy is strengthening. This isn’t about the yen, but it does help boost what the yen is being compared to, the dollar. A strengthening economy helps contribute to rising US interest rates, which will help the US dollar.
— There’s a belief that the endgame is in sight for the Fed to start ending its ultra-easy monetary policy. Things aren’t going to change overnight, but at the current pace of economic improvement, the Fed’s goals could be hit in late 2014, which is earlier than the previous 2015 tightening guidance. A tighter US monetary policy would benefit the dollar against the yen.
— End of the Eurozone crisis. Japanese assets had been seen as “safe-havens” to flee too during the crisis. With the Eurozone crisis ending, that safe-haven bid begins to deteriorate.
— Fear of war? Also thanks to Japan’s new PM Shinzo Abe, the country is likely to adopt an even more aggressive, militaristic stance towards China. One professor in Australia predicts war. As Matt Yglesias notes, any war (or war preparations) would likely be funded by aggressive money creation. More yen weakening.
— Japan’s economy is bad. In addition to all that, the economic data in Japan is deteriorating again, creating more reason for the Bank of Japan to do new measures.
One interesting trend is that a lot of these developments are fairly new. So there’s a confluence of a lot of stuff happening right now.
Two other notes:
One is that this isn’t necessarily a bad thing at all. A weaker yen is itself a form of stimulus, and should help the country’s domestic manufacturers. Nomura recently upgraded the Japanese automakers specifically on this, and in general the Nikkei has been on a total tear.
The other is that none of the above have anything to do with the typical Japan bear arguments about massive national debt and bond collapse. Those things that people freak out about don’t have much to do with things.
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