Not very often do we see the high trade for the year to be on the first trading day. Yet that is what we have in the USDJPY. On January 2nd, the yearly high (to date) was 1.0541. Looking at the CME open interest, specs on that date were long about 175,326 contracts. Then the total open interest was about 282,000 contracts. On the latest report, the spec position was down to 109K, and the total OI was 227K.
Clearly the market was overloaded with yen shorts at the beginning of the year, and we discovered once again the majority is never right for very long. As specs have liquidated, the USD has weakened to about 100.60. For specs this early year weakness has been a disappointment since the experts were calling a yen weakening to 112 to 115 to the USD.
Yen bears, perhaps accustomed to the 2013 run from 81 to 100, view this year's performance as a big disappointment. Does this mean the bear run is over?
After suffering from deflation for several decades, the newly elected PM Abe in 2012 vowed to end the economic morass that had trapped the Japanese economy. After all, how can the massive Japanese debt, over 230% of the GDP, be repaid with a more expensive yen?
There are numerous parts to Abe's grand plan. The centerpiece, off course, is vigorous expansion of the money supply, the Japanese version of QE. Remember with QE, the Central Bank buys existing outstanding debt, thereby giving the selling institutions an abundance of money to lend.
The Bank of Japan, in an attempt to get the inflation rate back to 2%, has been pumping about 60T yen ($0.59 trillion U.S.) into the economy per year. The government's target was a 2% inflation rate. The current inflation rate, 1%, has fallen short of the goal, so the BOJ is going to increase the monetary stimulus to 70T yen.
Some think this policy will fail.
"The BOJ's quantitative easing isn't very meaningful," said Akira Takei, the Tokyo-based chief fund manager for global bonds at Mizuho Asset Management Co., which oversees the equivalent of $39 billion, referring to the central bank's bond buying. "Borrowing would increase if companies can expect to make money from capital spending, but it's not the case now."
This is not to say the Abe plans are not achieving results. Earlier this week it was announced the Merchandise Trade Balance, at 2.79T yen, was worse than expected. Bloomberg reports:
"Declines in the yen are driving up import costs as the nation's nuclear reactors remain shuttered, while exports have seen only limited gains from the currency's slide of more than 20 percent against the dollar in the past two years. The trade deficit contributed to Japan's economy growing a less-than-forecast 1 percent in the fourth quarter, underscoring the risk that Abenomics may falter after a sales-tax increase in April."
Costly energy imports do remain a major problem as crude and liquid natural gas imports are both 28% and 21% above year earlier totals. Despite rumors Japanese nuclear plants are going to come back online, delays continue. Only recently there were reports of the leakage of radioactive water from the damaged Fukushima plant.
The Abe recovery plan has been criticized for the ever increasing deficit spending combined with the lack of government revenue. Commencing in April the sales tax will increase from 5% to 8%. While retail activity ahead of the tax increase will be brisk, the government is fearful economic growth in the second quarter will falter.
Some of the Japanese problems are similar to what has happened in the United States. In both countries manufacturing jobs moved offshore where labor costs were lower. The "salary man" jobs of the past with full benefits has given way to part time retail and service jobs. It is estimated that 40% of the Japanese workers are employed in these lower paying jobs.
The Japanese population is shrinking and aging. Any significant immigration is not permitted. In this circumstance it is difficult to envision the return of a vibrant economy with consumers active, spending what amounted to 75% of the economy. Those days are gone and higher taxes and energy costs will only make things worse.
The question then becomes are all the Japanese economic troubles discounted and thereby priced in the market? We are inclined to think not. It also appears that many of the yen bears have become impatient and left the market. At the IMM, there was a time when the open interest in the euro and the yen were about the same. Not so any more, as yesterday the number of open contracts in the euro was 291 compared to only 201 in the yen.
It is our opinion that the short side of the yen has appeal. Perhaps it is best to wait for a period of mindless safe haven yen buying, but failing that, the 102 handle looks like a spot where we would buy the USDJPY (FXY, UUP, UDN).