An article I published last December 6th for Seeking Alpha discussed the imminent steps enforced by the Japanese government to impose a policy of systematic measures to deliberately weaken the Yen as a means to jumpstart their stagnant economy and promote an export-led, reflationary program. At the time it was authored, $/ Yen was trading in the 82 range and was losing further ground, as the new carry trade was emerging and the Yen was now suspect as a traditional safe haven currency.
The currency wars erupted to the rage of Asian partners who witnessed their export market share eroding weekly. In 4 short months, $/Yen's appreciation to 100 was an unwelcome impact felt across continents. Within weeks, Toyota advanced as the global leader in auto sales eclipsing the US, European exporters realigned their pricing and China moved closer to being accused of currency manipulation as heavy-handed intervention suppressed Yuan strength to neutralize any FX activity endorsing Yen weakness.
Prime Minister Abe and Haruhiko Kuroda, were hosts of the all-night party that successfully powered the Nikkei forward, improved GDP prospects and turned around once immovable negative public sentiment. The Deejay was suddenly shut down late Friday with the unambiguous language from the U.S. Treasury clearly stating its disapproval of Japanese tactics to devalue their currency as their only competitive strategy. Although Japanese officials, determined to keep the celebration going after hours, made bold announcements that they will commence massive purchases of their government bonds, resulting in staggering increases in their money supply and flooding the markets with infinite liquidity as the fuel to ignite the reflationary recovery.
The Japanese continue to insist that the outcome from their monetary "free for all" will benefit the global economy, although world opinion remains highly cautious, as the QE expansion in the U.S. coupled with Europe's habitual rescue efforts, leaves little room for Japan, as the third largest economy in the world, to contribute to this dangerous practice of uncontrollable debt financing as a means to artificially stimulate growth and boost asset prices.
The U.S. Treasury comments will certainly not be in vain, as Yen sales will temporarily become scarce, sheltered from U.S. intervention, which will cause a revision of strategy and a 5-10% reversion back to $/Yen 92-94, levels less threatening to US auto makers, Euro exporters and Asian trade partners. The U.S. may have won this battle, but the war will linger on in stealth, undetectable by the public radar. The Japanese party will move to a new location, keep the car running and wait for Abe and Kuroda's text message.