Ralph Shell @ 1:41 PM, Thursday January 06 2011
For years the Japanese currency has been regarded as a safe haven during turbulent economic times. Those fortunate investors who believed in the yen, have been amply rewarded. Today a USD is worth 83 yen but going back to 2007 the same greenback would have purchased up to 121 yen, in 2008, 110 yen and even though the USD's value slipped, there were times in 2010 when the dollar was worth 94 yen. Despite very low interest on your money, parking that money in Japan was a big time winner.
The yen's strength has befuddled many 'experts' who have focused on the so called lost decades. Recovering from the devastation of WW2, Japan was the early economic bloomer, and as the rest of the world began to catch up, Japan's relative strength slipped. According to JP Morgan, their share of the global GDP was 17.9% in 1994, but by 2009 it had dropped to 8.76%, and their share of global trade had diminished to only 4%.
During the last twenty years, deflation has plagued the Japanese economy. Just as the Fed's Bernanke is currently vowing to fight deflation with his QE plans, the Japanese had tried this for years. Those efforts to curb the dreaded deflation failed, but the Keynesian spending was successful in elevating Japanese debt to over 200% of the GNP.
For years the Japanese debt has been financed by the frugal Japanese who had saved trillions, and were willing to loan those savings to the government at exceptionally low rates. Currently the yield on Japanese ten year notes is only 1.22%, a rate that allows to Japanese government to continue annual spending at twice the rate of annual revenue receipts. So far interest rates that have been creeping higher in many parts of the globe, have failed to reach Japan, but that is always a risk.
There are some other risks that may deter from the safe haven yen status. While Japan is a large exporter of manufactured goods, they are also a very large importer of commodities, specifically food and energy. We don't really need some UN Agency to tell us that global foods prices are at a record high. Soybeans, a major feed stock for global food production are worth about $525/MT FOB the US Gulf, an extremely high price. US corn prices are also elevated to lofty prices as US politicians insist of subsidizing ethanol production by doling out billions to the US corn farmers.
Japanese energy costs are also on the rise. Not only do they import sizable amounts of oil but the are very large consumers of coal. The growth of Chinese coal imports to fuel the Chinese power production has steadily boosted global prices, and the recent flooding disaster in Queensland Australia has now sent price soaring higher. Thus the Japanese trade balance will be hurt by higher import prices, and the strong yen has been a problem for the exporters.
It is easy to attribute the USD strength to a positive labor report, and then contend that failure to confirm this report in tomorrow's NFP will trash the USD. There may be more at work which dims some of the yen's safe haven status. In a week end article, Larry Kudlow observed:
"The elections were the first major step toward restoring free-market capitalism and rolling back big-government controls, planning, and spending. This is a money-politics issue. Stocks roared 20 percent during the second half of last year, as markets sniffed out the huge political change. Post-election, stocks also had a big move, finishing the year at better than two-year highs --- going all the way back to pre-Lehman Brothers........Sure, there were important economic factors involved. Europe didn't fall apart. The dollar didn't collapse. And better U.S. economic numbers started coming in. (Double-dip bears also were big losers last year.) But rising political confidence helped, too.
The emergence of Tea Party free-market populism -- what I call Reaganomics 2.0 -- is hugely bullish for stocks and the economy in 2011. Recall that in mid-December the Bush tax rates were extended and the earmarked omnibus-spending monstrosity was withdrawn. These were bullish events for producers and investors that may have pulled the curtain down on Obamanomics."
The NFP Report usually stirs up some action. We prefer the long side of the USD versus the yen over the longer term, but are cautious about the short term outlook. In the last COT report the big longs were the funds who owned almost 41% of the open interest. At the CME yesterday the yen trade was heavy, 185,000 contracts, and the futures OI was down almost 10% in a day. My guess is that the yen longs are liquidating, which gives us some courage for a few scale down orders.
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.