Last week I left you with the expectation of the Yen dipping further to reach the 102-103 area but highlighting a bigger risk of Yen appreciation over the coming months. Well, failure was seen at 101.43 which resulted it minor Yen strength. The question on my mind is whether we’ve seen the final move fail or is there one more to go…
Last week saw mixed economic releases. Bankruptcies rose but tradesmen’s outlook actually improving slightly. The bigger news was the unveiling of Prime Minister Aso’s record stimulus package. The government has committed a whacking 15.4 trillion Yen to try and reverse the largest recession since WW2. That’s the equivalent of 3% of gross domestic product and comes on top of the 12 trillion Yen of spending in earlier packages, as well as tax breaks and cash handouts last year.
Given that Japan’s GDP barely managed to reach much above 3% on only three occasions over the past 10 years that’s a significant commitment to “splash the cash.”
The bigger question is of course “will it have the desired effect?”
Well, let me ask from where all the 18% net growth came over the past 10 years?
The answer is exports. We all know that. The domestic economy has remained downcast throughout, still bogged down by house owners who are still repaying their mortgages which after 18 years are still larger than the value of their homes.
Therefore the only way Japan’s GDP is going to grow is from increasing global demand for its products. With the Yen barely managing to remain above the 100 level the price of its products remains uncompetitive. What is more, the Japanese consumer is renowned for its capacity to save so don’t expect much more than a blip once the tax rebates are issued.
The stimulus package must therefore be a desperate attempt to appease the voter…
Obama remains confident that the amount of money he is throwing at the U.S. economy will generate results but until that translates into a level of consumer confidence that will make them raise their credit card limits one has to wonder whether the downward spiral of job losses and lowering asset values can be reversed.
To be honest there isn’t much on the slate this week to really push things one way or another. Both Japan and the U.S. are due to announce the latest industrial production numbers but this does come on the back of continuing job losses from both countries.
So we’re back to just what will happen to the value of the Yen. My economic argument suggests a weaker Yen while my analysis suggests it will strengthen.
There has been a mild return to carry trades, predominantly against the Australian and New Zealand Dollars. This may be the first source of Yen strength. Frankly the Yen’s strength after reaching 101.43 has not yet been sufficient to suggest even a short term bottom for the Yen. That will require a break below the 95.90 area.
Thus, this week I’ll remain neutral and waiting for a stronger sign of the next move. If the Yen weakens beyond 104-105 I’ll review my forecast. Any break below 95.90 and I feel we should see the beginning of a Yen rally…
Other posts by Ian Copsey: