To the chagrin of the Bank of Japan, which would prefer to have a lower yen, and the many Japanese exporters harmed by the elevated yen, the turmoil in Europe continues sending haven buyers to seek the perceived safety of the yen. And as the European leaders have shown their inability to address the debt problem, the euro has lost on the yen. On April the 2nd the EURJPY traded above 111. Since then it has plunged to a low of 95.57 in early June. The rally in the euro did carry to 1.01 but has since fallen to under 98.
We can certainly agree the euro has not been a safe place to park money or make investments, but the Japanese yen merely seems like choosing the less ugly. Let us look at some of the recent data coming from Japan.
Today it was reported the current account narrowed to ¥215.1B, ($2.7B) less than the ¥511B economist had predicted. This is the 15th straight money the current account has deteriorated. It was reported at the same time m/m Core Machinery Orders were down 14.8%, compared to a 5.7% increase in the previous month. Japan is the world's third largest economy. Their largest trading partner is China, whose economy is also slowing, so further negative numbers are likely.
For decades the Japanese have tried, unsuccessfully, deficit spending to stimulate their economy. In the process they have accumulated a debt to GDP ratio that exceeds 220%, the highest in the developed world, and growing.
The defenders of the strong yen have long contended Japan, with amply savings invested in sovereign paper, and a trade surplus can overcome the fiscal deficit. We have noted the trade surplus is sliding away, and slowly, Japanese savings are being cashed in to take care of an aging population.
Japan does have the Government Pension Investment Fund, a $1.42T portfolio, the largest pension fund in the world. To pay the pensions of their rapidly aging population, since 2009/10, they have been a small seller of assets. In the 2011/12 period, they sold $32B of assets for the third straight year. Not a large withdrawal, true, but it is the start of a demographic trend.
On Wednesday this week, the Bank of Japan will make a Monetary Policy Statement. In some fashion we think the Bank will increase the yen supply, hoping to stop deflation and move toward their goal of a 1% inflation rate. The last thing the Japanese Government or The Bank of Japan wants is deflation. Paying off decades of accumulated debt with money that has appreciated in value would be impossible.
If we look at the USDJPY chart, this pair has been confined to a narrow range since the end of April. With the Bollinger Bands narrow, are we getting close to a break out? We are inclined to take a long USDJPY at about 79.60. Hopefully we will see an upside breakout into the low 80s. Risk no more than 100 points from the entry level.
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