What’s Behind the Yen Strength

madhedgefundtrader's picture

My old friend Peter Tasker (we both wrote for the late Far Eastern Economic Review in the seventies), ran an interesting editorial in the Financial Times today (click here for the piece at http://ftalphaville.ft.com/blog/2010/08/05/307281/pink-picks-565/ ). He examines the only two assets that have gone up in price over the past three years, gold (GLD) and the yen (FXY), (YCS).

While clearly not a gold bug, he does advance some interesting arguments on the Japanese currency. If the ten year JGB is at a 1.1% yield, and the deflation rate is 1.5%, then the real rate of return for investors is a mostly tax free 2.6%. But government statistics understate the case, as usual, and the real deflation rate is probably closer to 3%, taking the real yield to 4.1%, among the world’s highest.

Few central banks own yen, and therefore can’t sell it. Ditto also for JGB’s, which are almost entirely held by Japanese institutions because they have been so low yielding for so long.

This is why a recent miniscule redirection of new reserve purchases away from US Treasuries into JGB’s cause bond prices there to rocket, and the yen to take a run at a 15 year high at ¥84.8. A new all time high at ¥79.8 is not out of the question.

The yen strength will eventually end, because while gold cannot be created out of thin air, currency can, through a massive quantitative easing that sends the printing presses into triple overtime.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Strongbad's picture

I have been wondering why this massive appreciation has not been discussed more.  Thanks for taking the time to write something about it.  I have maybe 80,000 Yen in a cigar box that I need to put on Ebay before it turns around, haha. 

Amsterdammer's picture

While Japan announced another stimulus roundAlphaville digged into the data, no surprise,

China has bought USD 5 billion of yen, plus Japanese


For China,it's diversify,diversify,diversify


kaiserhoff's picture

Is MHFT real, or just a random bullshit generator?  Yen strength with the world's worst demographics and 21 years of ZIRP stupidity going for it?

Actually, this raises an interesting point.  In Japan, the 10 year is the long bond.  At 1.1 percent, what will that crap be worth when worldwide short rates snap back to at least 10 percent?  This is the bond trap that Baldy Ben is building.  One of the many poorly understood disasters of ZIRP.

NoVolumeMeltup's picture

"Is MHFT real, or just a random bullshit generator?"

It gets better. He seems to throw darts at map and then write an 'article' on why we should invest in the emerging markets of Upper Uncton.

bonddude's picture

Seems to be good evidence that it takes quite a while

and lots of printing to get to hyperinflation.

Nout Wellink's picture

Yeah, drive the yen down by 10%. Then we can buy it at a premium discount, and it will resume its uptrend in the deflationary ZIRP environment.

covert's picture

the gain is only incidental since the yen is only paper. the smart choice is to deal with metal. gold is the usual favorite but, there are other good choices also. japan however is a prime place to buy gold.