From the April 2013 issue of Futures Magazine • Subscribe!

The new “new normal” in FX

Yen finds its mojo

Concern over currency manipulation centered on new Japanese Prime Minister Shinzo Abe’s commitment to improve the Japanese economy and consequently devalue the yen through multiple policy initiatives, including possibly buying foreign assets. 

While the rally in the euro was a sign that the worst may be over for the Eurozone and things may be returning to normal, it was nothing compared to the yen depreciation vs. the dollar as measured by both its velocity and its meaning (see “Yen hits stride,” below).

 

“It would be a sign of global health if the yen continued its current path of weakness,” Wilkinson says. “I firmly believe the market is reacting to its expectation of what it feels the Japanese authorities can manage through loosening monetary policy. Everybody wants to see a weaker yen. The more the Japanese yen weakens, the stronger the Japanese economy. The earlier strength of the yen crippled its economy.”

At the heart of yen weakness is Abe’s efforts to improve Japan’s economy. “The Japanese finally have come to terms with inflation and are trying to stimulate the economy,” Chappell says. 

“The Japanese had been in an extended period of appreciation because it played into this [risk-on/risk-off] fear largely dominated by this worsening global outlook,” Wilkinson adds. “The stronger the yen became the weaker demand for its goods. When it was perceived that a change in the Japanese government might be able to target something more special, traders really got the bit between their teeth.”

But the move in the yen has been substantial given it has not been backed up by tangible policy moves, and it has been reported that Abe has recently backed off of an earlier pledge to buy foreign assets to help devalue the yen. 

Conklin says the current yen move may not be sustainable and points out that Japanese financial markets are not as deep and do not offer as many tools for the BoJ to affect interest rates. “The JGB market is not as deep and liquid [as U.S. Treasuries],” Conklin says. “In the U.S., the Fed is tapping into [mortgage-backed securities]; there is no such market for the Bank of Japan to tap.”

He adds that the end of the yen rally could extend to other currencies. “What happens to the rest of the FX markets when the yen starts appreciating again? A lot of the optimism on Asian markets will [take] a hit,” Conklin says. 

However, Wilkinson believes yen weakness will continue and targets 100 by mid-2013 and 110 by year-end. 

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