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Why the World’s Worst Economy Has the Strongest Currency.
Global currency traders remain puzzled by the continuing strength of the yen (FXY), (YCS), which broke out of a ¥90-¥95 range a few weeks ago and insists on levitating around the ¥86-¥89 area.
Looking at the fundamentals, you would not pick Japan to possess one of the world’s most virile currencies. It runs one of the planet’s largest and most rapidly climbing budget deficits, suffers a demographic nightmare of epic proportions, and lives in the shadow of China, which surpassed it in GDP this year to become number two. It produces a tenth of the Middle Kingdom’s new per capita GDP.
And the ruling Democratic Party of Japan (DPJ), which promised to weaken the yen, just took an absolute pasting at the polls.
The reason is simple: the fundamentals are so poor, that no one owns the yen, and therefore, can’t sell it. Central bank holdings of the Japanese currency have been plummeting for years, and are now thought to be around 10% of the total.
Japan’s 15 year old zero interest rate policy made it unattractive when the others were yielding 5%-6%. Now that all the major currencies yield close to nothing, the playing field is level. While the government has been a massive issuer of debt, thanks to the country’s high savings rate some 95% is held domestically, unlike the US, where more than 28% is owned by foreigners. You don’t hear rumors of China threatening to dump its JGB holdings, because they own virtually none.
Japan’s notoriously anemic long term growth rate of a minuscule 1% hasn’t exactly seduced managers to pack their portfolio with yen assets. Risk reducing hedge funds buying yen to unwind carry trades has been another dynamic at work (click here for an explanation at http://www.madhedgefundtrader.com/march_25__2010.html ).
But it doesn’t look so bad if you think that the US growth rate is about to double dip into negative numbers. Yen bulls, and yes, there are such people out there, are hoping for a run to the 1996 high of ¥85, and even an overshoot to the all time high of ¥79.5. If that happens, you can kiss the Nikkei goodbye, and watch 10 yen Japanese bond yield touch 0.45% once again.
This is one slugfest that I prefer to watch from the sidelines. I think the long term trend of the Japanese currency is down from here, and won’t own it here on pain of death.
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 and a half 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.
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China will be the answer to Japan's problems.
DE- LEVERAGE - ING
The growth in Japan is real though.
The growth in the other western economies is just fake 'financial' growth.
Japan is one of the world's most fundamentally sound economies, has a ridiculously undervalued stock market, and has only been suffering because of the long-term trend in the declining price of highly engineered goods and services.
Also take into account that the coupon on Japanese holdings of US bonds provides the dollars to purchase ~1/3 of their oil imports.
Japan runs a trade surplus with the rest of the world, even at the severely depressed prices in the engineered goods and services they produce. The USA could completely implode, T-bonds become worthless, and Japan would not be affected.
MHFT says:
that no one owns the yen, and therefore, can’t sell it.
This statement is literally false. Obviously any commodity or currency has an owner. Perhaps he means that speculators with no business or personal reason to own yen actually owns it; and in fact they have been short it. In other words, perhaps he is saying that the yen's owners are the proverbial strong hands, because it is owned almost entirely by Japanese and businesses with business needs to own yen.
Could there be another non-economic explanation? Japan continues to be occupied by US troops. When its currency appreciates materially vs the USD, the yen value of the USD it owns drops. Thus it is losing yen-denominated wealth. So could the continued decline of the USD vs the yen be at least in part caused by power politics?
Few Americans and Europeans dispute US-Japan trade relations in terms of Empire, because imperial masters converted to imperial clients are deluded by past institutions and mores of the prior relationship. Your inept and obsolete use of "occupation" evokes the Cold War institutions of NATO and Warsaw Pact, which institutions have been totally destroyed; that your "occupation" is inept and obsolete is illuminated by contrasting the two "occupied" major NATO allies, Japan and Germany. In 1988 Japan assumed financial primacy from the US, which assumption Germany attempted unsuccessfully twice in 20th century and was repelled and totally destroyed twice by Anglo-Americans; so any use of US soldiers in Japan necessarily differs from their use in Germany, and also only Japan pays for the cost of US soldiers both in Japan and in Okinawa; thus having assumed primacy from the very same Anglo Americans who so adamantly repelled Germans, Japan uses US soldiers as mercenaries in Japan and Okinawa in the same way Japan uses US soldiers in Middle East in order to protect its crude oil supply: Japan imports over twice as much oil from Persian Gulf as US, but no Japanese boys are maimed and slaughtered in Iraq or Afghanistan. If true, then Japan's financing of US trade deficit provides two benefits to Japan: consumer market and mercenaries. Again, such a US Japan relationship necessarily is painful and disgusting to Americans and Europeans, so expect both to either ignore these truths or more likely delude themselves perhaps assisted by drugs (increased opium addiction in China during decline and disintegration).
Yen and euro wre touted as alternatives for USD after 2008
But Euro being another 'Free Unemployment benifits for all' currency
One should prefer Japanese who are working even into their 80's but believe in toil and labour .
I would have preferred CHF but recent dramatics by SNB is revolting to say the least
Quest for least worst currency is on!
Mr. Mad Hedge Fund Trader has been one of the most vocal bears on JPY (and long duration U.S. Treasuries) in 2010. I have happily been long of both all year.
I need scarcely point out that the unlevered total return on 30 year Treasuries has been north of 15% in 2010. The yen is stronger by 6.63% in 2010 against the dollar, making it the best performing currency in the world. Mr. MHFT's favorites, like the Aussie doolar, are 2% weaker on the year after having been down as much as 12% on the year.
I can only conclude from his public opinions that Mr. MHFT's P(L) must be deeply in the red this year, unless his sense of market timing rivals that of Future Man the time traveler.
Perhaps he can explain why we should be short a currency that has among the world's highest real interest rates, and a net foreign asset surplus of 2.5 trillion. Nobody in the world owns yen except the Japanese. And the Japanese themeselves are actually short to the tune of of 2.5T USD. This is strange because Japan has the world's 2nd largest economy, and the yen holds the third largest share in trade. You overestimate reserve holdings of JPY, it is closer to 0% than 10%. Why do reserve managers hold a far larger weight in sterling than they do in Yen, despite the vastly larger weight of the yen in both global trade and the SDR basket?
When the Chinese and the Arabs decide to reweight their reserve baskets, it is the yen they are going to buy. Not gold, not Aussie, not Canada. Even getting to a 15% weight implies the rest of the world has a bid for a trillion USD in yen. Add another trillion of repatriation flows, plus Japan's continuing current account surplus, and you figure the BOJ will need to absorb about 2.5 trillion of USD inflows. That is too big, they will lose their nerve, and USDJPY will collapse.
The thing about zero percent interest rates: The Fed is a far deadlier enemy than the BOJ.
If you listen to Mr. Mad Hedge Fund Trader on the yen, you are going to end up broke.
Thank you cheese.
Would you answer your own questions please, for my own education (not MHFT)
"Perhaps he can explain why we should be short a currency that has among the world's highest real interest rates, and a net foreign asset surplus of 2.5 trillion. Nobody in the world owns yen except the Japanese. And the Japanese themeselves are actually short to the tune of of 2.5T USD. This is strange because Japan has the world's 2nd largest economy, and the yen holds the third largest share in trade. You overestimate reserve holdings of JPY, it is closer to 0% than 10%. Why do reserve managers hold a far larger weight in sterling than they do in Yen, despite the vastly larger weight of the yen in both global trade and the SDR basket?"
and this
"The thing about zero percent interest rates: The Fed is a far deadlier enemy than the BOJ"
Thank you for posting this explanation to a question I have been carrying around in the back of my mind, next to an image of Eva Green in The Dreamers.
The yen defies all the economic pundits. Why? Perhaps the way macro economists view currencies is fundamentally wrong.
This. If you're FX trading based on economic fundamentals, you're literally as stupid as someone trading stocks based on economic fundamentals.