The market's focus in recent days has been on the relatively sharp appreciation of the yen and the decline in equity prices. Over the past five sessions, the yen is the strongest of the majors, gaining about 2% against the US dollar and flirting with a 2.5 month uptrend.
During the same time, the Nikkei has slumped over 5% and is easily the worst performing major equity market. It is now off 12.25% for the year.
We caution against reading the dollar-yen's price action as particularly dollar bearish. The pair remains range bound. The dollar was toying with the upper end of last week as it tested the JPY104 area. This week it has approached the lower end that extends toward JPY101.20 (last month's low), if not the February low near JPY100.75. We suspect the near-term risk in on the dollar's upside and extends back toward JPY102.50-80.
The Nikkei has gapped lower three times in the past four sessions. Like the dollar against the yen, it looks heavy, but it is approaching a low risk opportunity. We suspect the market will bounce, and prices will look to fill the vacuum created by the lower openings in recent days. The 14200 area offers support ahead of the year's low set in early February near 14000, which was also the low from last November.
There are three developments in Japan to note. First is a corporate governance issue. Earlier this week, Japan's Diet began the process that will likely lead to more outside directors at Japanese companies. It has long been resisted by businesses. This is one of the reforms that falls under Abe's elusive third arrow and is a key weakness in Japan. The LDP is expected to present a formal proposal toward the end of Q2.
According to Bloomberg, just 1.1% of
