Forex traders who correctly anticipated the yen was going to fall against other currencies have had a good month. At the beginning of January, the USD/JPY was trading just under 87¥ to the USD, By the end of the month, it had slid to over 91¥ to the USD. Even more impressive was the strength of the euro compared to the yen, as the euro gained from about 114.50 to over 1.2350. For those carry traders seeking a cheap funding currency to buy notes in higher yielding countries, borrowing the yen and buying notes in Australia and New Zealand also has been a winner.
As we have pointed out, the weekly COT reports have consistently shown the speculators short over 100K contracts of the yen, although this position has been reduced from over 140K contracts in early December. This has been a lucrative trade for the specs, and may be a big reason why Forex trade has increased. At Cash Back Forex, the number of new customers opening accounts in January was almost twice the number opened in December. Granted, December is a slow month because of the holidays, but total new accounts opened in January were higher than any month in 2012.
Credit the new Prime Minister Abe for the shake up. For decades, the Japanese economy has been slowing, with deflation a hindrance. The goal of the Abe administration is 2% inflation a year. To achieve this goal and revive the ailing Japanese economy, the new administration would employ classic Keynesian tactics.
First, the yen supply would be increased by the Bank of Japan, a version of QE. If the current BOJ bankers will not do it, Abe will replace them in April.
Second, the Bank of Japan would be encouraged to buy foreign sovereign debt, which would involve selling yen to buy currencies to pay for the bonds. Since Japan already owns over $1T of U.S. debt as well as other debt, this is not an alien concept.
Third, the result of the first two would be a cheaper yen. For years, the vaunted Japanese export machine has been handicapped by a high priced currency. The situation became acute this year when Japan had its first negative trade balance. For years, Japanese business had flourished. Of the top Global 500 countries, 68 are domiciled in Japan, and they did not achieve this size in Japan alone.
Finally, Abe would try to get his listless economy awakened with more deficit spending. This would include infrastructure spending and increased military spending.
The increase in military spending is bound to cause controversy. Yesterday, the Financial Times reported:
"Japan is to increase defence spending for the first time in 11 years in response to a stand-off with China over the ownership of islands in the East China Sea, crystallising a harder line on military and territorial matters promised by the new conservative government."
Both China and Japan claim ownership to several uninhabited islands in the East China Sea. The controversy has resulted in reduced export sales to China from Japan in recent months. Possibly there is another reason for Abe to increase his military strength.
Since WWII, the defense of Japan has, by agreement, been the responsibility of the U. S. military. The American people are tired of serving the role of the world's policeman, and while doing so, spending almost 5% of their GDP for the military. Abe may rightly sense the winds of change are blowing his way.
The Abe plans seems timely, and perhaps favored by the people. Today, an opinion was expressed in the Asian Times:
"Japan Beats Chest in midlife crisis... The median age in Japan is currently 45 years old. By 2030, the average person in Japan will be in their 50s, and it appears that most of the population is experiencing a nation's midlife crisis already. For the past decade or so, Japan has increasingly longed to remember a time of great economic and military success."
The multifaceted approach to the moribund Japanese economy seems to have gained traction in Japan. The attached charts show the USD/JPY (FXY) and the NZD/JPY appreciating against the yen. Likewise does the AUD/JPY (FXA), though we would not want to buy the aussie until after the Reserve Bank next week on the 5th.
We have strong trending markets, for good reasons. Many of us have taken profits too quickly. Remember, real strong markets will not give you a break to buy. In this case, the buying opportunity may be when the market stalls and goes sideways, and then gets energy for another run to the up side. If you do try to get into this one, give yourself a little room with the stop, and perhaps to work with less leverage. Good luck.