If you are lucky enough to have profited from the recent appreciation of the Japanese yen against the U.S. dollar, now might be the time to take your ball and go home. The dollar hit new lows against the yen in three consecutive trading days during the week, culminating in a record low of Y75.64 on Thursday. The yen's rise has largely been fueled by the disappointing pace of the U.S. economic recovery and investor fear over the European debt crisis.
The Japanese central bank has ratcheted-up the intervention rhetoric of late, noting that a rapidly appreciating yen hurts Japanese exports and jeopardizes the country's recovery from the March 11 earthquake. So far this month, the Japanese have stopped short of intervening directly into the currency market, opting instead for monetary stimulus in the form of increases in government bond purchases--the central bank increased the amount allocated for asset purchases to 20 trillion yen on Thursday. The BOJ also pledged to keep interest rates at zero.
The move had virtually no impact on the yen and anything short of an outright intervention in the currency market is unlikely to arrest the yen's rise against the dollar. Particularly disturbing for Japan is the fact that Japanese manufactuers have based their current fiscal year earnings forecasts on a dollar/yen exchange rate of Y81.15, far from the current rate.
The debt deal struck by European leaders last week caused a broad sell-off in safe-haven assets including the dollar which fell 2% against the euro on Thursday. With new doubts surfacing about the viability of the new debt plan, expect investors to flee to the dollar at the first sign of danger in Europe. Combine this with the fact that Japan's finance minister seems poised to make a move similar to Japan's August sale of 4.5 trillion yen, and it looks like a good time to take profits in the strong yen.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.