Since the unsuccessful attempt by the Bank of Japan to weaken the yen in early August, the yen has been a popular currency. Versus the U.S. dollar, it has strengthened back to the 76.50 to 77 level after that brief intervention inspired sell off to the 80 handle. The success of the SNB did give us a weaker yen briefly, taking us up to 77.85, but once more the yen has appreciated to its rightful level versus the USD of 76.70.
At first blush, the Japanese economy with its many problems seems like an illogical place to park some cash. The money pays virtually no interest, the government expenditures fall far short of revenue, and this has resulted in sovereign debt issuance that has given Japan one of the world's highest ratios of debt to GDP in the world. The Japanese have not replenished their aging population with new births. Immigration into Japan is discouraged, so the population is decreasing. And since the real estate bubble broke several decades ago, deflation has been a persistent problem.
The March tsunami/earthquake tragedy had been another obstacle, destroying infrastructure and much of the nuclear capacity Japan relies upon for power. To replace this power source, Japan has been importing large quantities of coal. It is also interesting to note, Japan is requesting permission from the U.S. Department of Energy to commence importing liquefied natural gas from the U.S. beginning in 2015. Energy Secretary Chu, seemingly opposed to all carbon fuels, is probably embarrassed because of our natural gas surplus. It will be interesting to see how this plays out.
Despite the Japanese difficulties, problems elsewhere in the developed world may be making the yen a winner in the least ugly contest. Europe and the United States, with the massive debt weighing on their economies, is about to pay the price for the Keynesian economic spending policies their politicians so foolishly embraced. Spending money, rewarding your friends and contributors, gives the economy a boost, but now those happy days have passed. The party is over and it is time to pay the bill. Perception the Japanese will be more adept than the U.S. or the eurozone in addressing these problems has helped the yen.
Merkel, Sarkozy and Papandreou announced in a conference call that Greece is to remain a member and all will be worked out. Equities are firming somewhat, but the currencies seem dubious. This is the final chapter in this saga.
The yen, compared to the USD, has traded in an increasingly narrow range. The new PM Noda does have a fund set aside for intervention, so we wonder how much lower can the yen drift. Should the BOJ then encourage Japanese companies to use currencies acquired to acquire overseas assets, selling the strong yen could play to Japan's advantage. Over time selling high and buying low seems to work.
We are thinking of buying the USDJPY on a scale starting at 76.40, and adding to the position every 50 down. In addition to proper funding, you will probably need some patience for this trade.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
