Prime Minister Abe and his ruling Liberal Democratic Party are honoring their campaign pledge, taking measures to weaken the yen, and stimulate economic recovery. For decades, the economy has languished in a deflationary spiral that has resulted in a moribund economy, deflated equity markets, and despite extremely low interest rates, an elevated yen (FXY).
Naturally, the strong yen has hurt Japanese exporters and recently resulted in negative trade balances. Our views have been bearish on the yen versus the Australian and U.S. dollars for several months, but the move to the downside has been so decisive, we are reluctant to press the market here.
Granted, the Japanese Cabinet did approve a fresh stimulus plan of ¥20T, or about $22.4B. Included in the plan is infrastructure rebuilding, which will include renovating Japan's aging tunnels bridges and rail tracts. This stimulus is designed to create 600,000 jobs, and end Japan's third recession in five years.
These plans make headlines, and may elicit applause from Krugman and his Keynesian pals, but there are other considerations. Currently, the unemployment rate in Japan is about 4.0%, so where will the new hires come from? Further, according to the CIA World Fact Book, the median age of the Japanese is about 45.4 years, and among the oldest societies in the world. Do they bring some of the old boys out of retirement?
Pressure is now on the Bank of Japan to start the printing presses and try to get this inflation started, but is this really such a good idea? Currently, the rate on Japanese 10-year bonds is .82%. The Japanese have a debt to GDP ratio of over 2, and the Japanese government must finance about 55% of their budget. What will the cost of financing the Japanese debt be if they are successful in getting the inflation rate up to 2%?
Some of the relative strength in the yen versus the USD today may be due the unexpectedly widened trade gap today. The estimates were for a trade deficit of $41.3B for the month of November, as the energy bill was supposed to diminish. However, increased demand for foreign goods, and especially autos, ran the deficit up to $48.7B. This number is negative for the USD.
At 89.31 yen to the USD, this puts the weekly RSI at a very "overbought" 83.3. The weekly and monthly charts show a runaway bear yen market versus all currencies. A retracement could occur at any time, but there appears little resistance on the top side until the 94 handle. Perhaps the market is telling us that Abe and company are about to make a mess of astonishing magnitude.