What’s Behind the Yen Strength

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.


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