A while back I wrote about euro strength and yen weakness. this is an update on the yen side. Fundamentally the euro side remains firm as previously discussed.


Japan had a ‘weak yen’ policy to support its exporters. The export model was to keep domestic demand low via relatively tight fiscal policy/large demand leakages/institutionalized ‘savings’. And then dollar buying to keep the currency/real wages in check.

They had accumulated over $1 trillion, back when that was a lot of money, when US politics put an end to it, with Paulsen calling them currency manipulators and outlaws.

Japan takes that kind of thing seriously from the US and stopped buying dollars, with the yen subsequently appreciating from over 100 to something less than 80.

With the politics now changing, so is policy. Japan tested the waters with an announced dollar buying policy a while back with no negative political ramifications from the US. And the euro zone’s financial crisis has caused the EU to welcome foreign buyers of national govt debt, which firms the euro.

Japan has not announced dollar buying but their dollar fx reserves are growing. Those dollars have to come from somewhere?

And there is reason to believe a hopelessly out of paradigm US Treasury Secretary might be welcoming dollar buying our of concern of the US Treasury being able to fund itself, particularly when the Fed stops its purchases.

And Japan’s trade surplus has been going away as well.

So it may be the case that Japan is in the process of resuming it’s traditional dollar and euro buying, which can move the currency to whatever level it desires. Which is probably back to north of 100 to the dollar?

Lastly, there is a record yen short position being reported. While this could mean it’s getting over sold and subject to a rally, it could also mean insiders have been tipped off to this policy shift and will profit immensely.

Caveat: If all the noises around the coming election and weak yen policy result only in an increase in the inflation target and ‘unlimited qe’ involving only yen financial assets, that policy will only serve to make the yen stronger and a wicked short covering scramble will follow.

Nothing short of buying fx, directly or indirectly, will do the trick.

5 Responses

  1. I’ve been wondering how long it would take Japan to effectively tell the U.S. to sod off. If everyone else can by dollars, why can’t Japan?

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