The yen eases back against the rest of the world.

The yen settles into a trading range

Well, well… the market is back to selling the Yen.

Why is this? I’m not sure there’s any definite reason except the market recognizes the pain the economy here is going through. The size of the collapse in GDP really does highlight the dramatic U turn made from a year or two ago.

Until there is some overwhelming impact on the perception of risk, a flight to quality it seems as if there is no mood or will to buy Yen at this time.

One point I have not noticed any mention is the risk pointed out by some Japanese commentators of Japan’s own potential subprime crisis.

Ten years ago the government organized a fixed rate mortgage scheme which guaranteed a rate of 2% for the first ten years. So confident were they that the economy would recover they lowered the minimum salary requirements by 20% to ¥4m pa and provided a 100% mortgage – ie no deposit required by the borrower.

These are due to start running off over the next two months and effectively double in many cases the interest payments and commentators believe that millions will not be able to afford these higher payments…

Heard the story before?

Will it cause a rise in bad debts? And will that cause the Yen to drop – or to rally? I can never work out what will actually happen since there is always the risk of repatriation of offshore investments. Normally the market waits and once it sees the move it will apply the argument retrospectively.

Otherwise the economic numbers over the past week have been modestly positive from all around the globe. The stimulation packages appear, on the face of things, to be generating more positive data, personal spending higher, confidence is growing and a modest rise in manufacturing.

While the U.S. figures were better than expected, unemployment still rose by 0.2% to 9.4% in the States and to provide a stronger recovery we need to see more people back in jobs. That seems a bit difficult to imagine in Japan at the moment unless there is a dramatic shift in overseas demand.

Industrial production may have jumped but we have to remember that 5% of what is effectively 50% of one year ago doesn’t really reflect a spectacular recovery and as in het States, unemployment is still rising and has reached 5%. It hardly reflects strong fundamentals yet…

So, while I had been bearish for the Dollar against the Yen, with the Dollar having just hit a cycle low last week, the risk is turning higher. It has to get above 100.50 to really start to threaten a break above the 101.43 high seen so far this week so until then I’ll remain neutral. Frankly, this does seem to reflect recent market sentiment which has hardly been dynamic in either direction recently.

Thus, it more a case of “wait & see” and to allow a more substantial impact to develop.

Ian Copsey


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