On January 27th in Japan: Will the Yen follow the Economy Down? , I sent a trading alert to subscribers, warning that the Japanese Yen was extremely overbought, and ripe for a reversal against consensus:
At current levels sub 90 on the cross rate, any return of risk appetite by Japanese retail investors or signs that the yen carry reversal has run its course could send JPY spiraling downward back through 100 very fast indeed, with a possible trigger being intervention in the currency markets by the BOJ. I'd expect the Yen/$ rate to be in the range of 105-115 by year end, assuming some signs of a US economic upturn by then and a recovery in Japanese retail risk appetite. For those seeking exposure to a possible trend reversal, YCS is the Proshares Ultrashort Yen ETF, but currencies are notoriously volatile so caveat emptor.
That proved a timely call, and the Yen is now above that key 100 level; the YCS ETF rallied 25% within a month of that alert as incoming economic data confirmed that Japan was the worst affected major economy in the current crisis. Japan's exports nearly halved in February, the biggest decline on record, as car shipments to the US and Europe plummeted. Exports tumbled by 49.4%, the sharpest decline since Japan's ministry of finance began compiling trade figures in 1980. Japan's carmakers have been among the hardest hit by the global downturn. Shipments of cars plunged 64%, with those to the US down 71%.
Overall exports to the US fell by 58%. Demand slumped in all regions of the world. Exports to EU countries dropped 55% while shipments to other Asian countries were 46% lower from a year ago. The OECD now expects GDP to slump 6.6% in 2009. Even the country's vast private savings are now declining, down 5.7% yoy, which is ominous in a country which is the first in the developed world to experience demographic decline and with ever expanding fiscal deficits to fund.
I've been a fundamental bear on Japan for a long time (see Japan: Groundhog Day... last July for example), warning of a political system that is unwilling or unable to reform the economy to make Japan more competitive, cultural sclerosis, a national debt burden approaching 170% of GDP within a year and a declining and rapidly ageing population. A country in accelerating secular economic decline is very unlikely to sustain a strong currency, leaving one less competitor for the dollar in the tallest pygmy stakes.