Of late, the yen has been rallying.
That has been fueled by:
* strong capital spending in 2Q06
* thus, speculation that Mr. Fukui will raise rates yet again
* a record yen-short position of US$ 9.5 bn, and
* a "stronger" RMB exchange rate, and
* speculation that stronger Asian currencies will be a theme aired at the forthcoming IMF/World Bank meetings in Singapore 15th - 17th September.
We think that yen strength is short-lived, especially against high-yielding currencies like the New Zealand and Australian dollar, the Pound, and the Euro:
1. No significant BOJ rate hikes. We stick to our view that policy-making is of tribal nature in Japan. They have to raise taxes next year, so why kill the recovery by raising rates, too>
2. Worsening stock market drives outflows. The Economic Time® in Japan keeps worsening, and that will hurt earning - so money flows back out, and
3. The future Prime Minister, Mr. Abe, will halt Mr. Koizumi's reform process. In order to get support for his party ahead of the upper house elections next year, Mr. Abe will ask the wise reformer, Prof. Takenaka, to go. That will add to the gloom especially of foreign fund managers who have been buying into the "New Japan" story fanned by Prof. Takenaka's reforms.
Money-making implication: go back to the carry trade!