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Commentary & Analysis
Talk of yen intervention makes sense…but first Brexit to deal with
Japanese industry is worried the yen strength will hurt its overseas sales.
The yen’s recent approach to ¥100 against the dollar has provoked speculation that the Ministry of Finance may be poised to intervene for the first time since 2011.
“We think the time to act has already arrived. It’s already ¥104, ¥105 to the dollar. It was ¥118 in January. From ¥118 to ¥104 — that’s ¥15 in six months,” said Mr [Sadayuki] Sakakibara [chairman of the powerful Keidanren business lobby].
“That is not orderly. Extremely disorderly is all you can call it. To keep it stable in a reasonable range then certainly the Ministry of Finance should act.”
Financial Times , 20 June 2016
It used to be no matter how strong the value of the Japanese yen, the country’s trade balance remained quite high; even despite attempts to punish Japan a la the the Plaza Accord [G-5 countries intervening back in September of 1985 to weaken the dollar against both the Japanese yen and Germany mark].
In the chart below I have overlaid the USD/JPY on top of the monthly Japanese Trade Balance going back to 1982. The yen weakened from a whopping 277 to the dollar during 1982 to just 84 yen per dollar by 1995. Yet, as said, Japan’s trade balance remained strong.
In the chart below, I have shifted the USD/JPY by 20 months into the future. As you can see, the correlation between the value of the yen and trade is seen more clearly.
The game changer of course was the credit crunch, which altered the supply and demand dynamics in the global economy in a very big way. As the yen strengthened on haven flow from around USD/JPY 123 to USD/JPY 77 in the midst of the credit crunch, Japan’s trade balance started consistently deteriorating.
Thus it was the beginning of the three-arrow strategy from Japanese PM Abe—the first arrow was intended to weaken the yen. And as you can see in the chart above (and below) it worked.
So, based on the correlation seen above, it seems in this new abnormal world where demand is not quite stagnant, but weak at best, Japanese industry seems right be worried. It suggests calls for intervention may soon be acted upon.
However, I suspect Japan is keeping powder dry till after the Brexit vote. Because if the Brits decided they want sovereignty back, the yen likely rally sharply again on haven flow, similar to what it did during the credit crunch, but in mini-fashion.
Next stop on haven flow to the yen is likely the 100 target many have discussed. It represents a 50% retracement from the low going back to November 2015—when the three-arrow strategy got underway. But after a move to 100, it would seem the potential pressure would be too much for Japan’s government—they would likely decide to step in with barrels blazing.
If the “remain” block wins the Brexit vote, either $-yen rallies (yen weakens) of its own accord and/or the government helps it along; that seems the consensus bet. But Mr. Market is likely to be particularly tricky in here so any confidence in the consensus should remain limited.
President, Black Swan Capital