Ralph Shell @ 1:40 PM, Wednesday May 26 2010
For years the yen has been the place to be during troubled times, and the recent global economic maladies confirmed this is still the case. This comes despite warnings to the Japanese from the IMF last week, and today, from the Organization for Economic Cooperation and Development.
The IMF reminded the Japanese that their public debt, which now exceeds 170% of the GDP and continues to grow is a problem. Beginning in 2011, they should begin to reduce their deficit. This is clearly not the policy of Yukio Hatoyama's Democrat Party, spending like they are related to Washington's Democrats. They are giving away yen for the new born, more yen for back to work training for the mom's, and money for farmers and other good causes. So much money in fact, that taxes collected are less than 50 % of government disbursements.
Today it was reported by Reuters in Tokyo that the OECD had the following advise:
"Japan should scale back stimulus spending in the fiscal year from next April and use tax reform to rein in public debt and protect its economy from a rise in long-term interest rates, the OECD said on Wednesday......"A scaling back of fiscal stimulus in fiscal 2011 ... could result in a temporary moderation in domestic demand growth. However, it would limit the very high public debt ratio."
"Greater use of quantitative measures by the central bank, notably larger outright purchases of government bonds, especially those with long-term maturities, may help by providing more liquidity to the market and promoting expectations of an end to deflation," the OECD said."
Scaling back the ruling parties spending agenda will not happen because of the busy bodies at the OECD. Further, how can they assume that rates will go up because of excessive borrowing? Currently 5 year Japanese notes yield .42% 10 year notes 1.22% and the 30 year notes only 2.04%. The Japanese have been consistent big deficit spenders since their 'lost decade' and rates are still low. Why? Because rates only go up if there is private sector demand for money, and the private sector has little interest buying assets that deflate in value.
The Japanese continue to find investment opportunities, but most of these are abroad. Finance Minister Kan reported yesterday that net foreign assets owned by Japanese investors increased 18.1% last year. Our guess is the recent yen strength will hasten the flow of funds overseas, as the thrifty Japanese investors get more for their money with the yen firming to the 90 level.
The yen had been a very popular spec short, but the latest strength caused by market turbulence, took some out of the market on the strength under the 90 handle. The current 2H USD/JPY is building a base around the 90 area. Let's try the buy side a little above 90, risking 100 and targeting a return to 92.50.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.