A Yen for a Weaker Currency

Japan’s exports fell by 5.8% in August from a year earlier and imports slid by 5.4%, leaving a trade deficit of Y754.1BN. Meanwhile, the Bank of Japan expanded its QE programme by 25% to $697BN in an effort to stem a rising Yen after Q212 GDP fell to 0.7% annualised, half the pace forecast and way down from Q1’s 5.5%

Will the Yen weaken?

We think yes, but not because of more QE. In stead we prefer to study the collective social mood of any society, by way of the local stock index, perhaps the best barometer of just how they are feeling.

One look at Japan’s Nikkei 225 Index above will confirm a collective negative social mood since the late 1980’s bursting of the bubble, which has witnessed a trend towards less consumption due to fear of unemployment and other deflationary bear market traits, such as aversion to debt and risk taking in general.

It is also interesting to note that vast quantities of QE and other stimulus activities, such as roads to nowhere and airports that have never seen an aircraft, failed to reverse the collapse of the stock market and other financial assets, such as real estate.

Furthermore, over the intervening period the Yen has gathered strength, despite the aforementioned policies, as can be seen in the next chart.

 

We note an interesting correlation between Yen strength and Japanese consumption that has broken down over the past few years. It suggests that the Japanese society is feeling a little more positive, as evidenced by a “basing of the Nikkei stock index,” and are fed up with hoarding savings in a banking system offering negative returns, albeit that this was perfectly natural during the deflationary years.

Assuming a higher stock market to come, consumption will rise further and the Yen is about to weaken substantially to chase the consumption correlation once more.

A quick glance at Fibonacci retracement levels suggests a $US/Yen rate target of 103 to 120 from the current 78 and it will have nothing to do with political intervention.

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