The yen strengthens on the DJP whitewash

How long it will remain strong is a different issue

As the confirmation of the massive rejection of the LDP in favor of the DJP began to trickle through, the first thing the forex market did was buy yen.

It’s not really a vote of confidence but more perhaps a reflection of international politics or maybe something even more simple – given the corporate tax holiday there is a repatriation of profits by Japanese companies coming up to the fiscal half year end.

Indeed, I quite like that story since it tends to back up my comment last week that the dollar should remain weak into the middle-end of September due to negative dollar cycles. I’ll stick with that view and it’s quite possible to get quite close to the 87.10 extreme which has been tested twice already.

However, no one is looking at the DJP victory as anything but a clear rejection of the LDP. I don’t even think the electorate is being duped by the promises of an expansion in social welfare and minimum pensions as any dramatic improvement. They all know it has to be paid for and with nearly 30 percent of the population soon to be retired, the availability of funds is not expansive.

This could imply an increase in the issuance of government bonds but with the promise of global inflation following the past year’s fiscal stimulation it can only mean one thing in Japan. Inflation is something that those under 30 won't even remember and so it will come as a big shock.

But frankly all this will eventually pass over the forex market which is more focused on the States and the apparent recovery.

The economic numbers coming from the States right now are unsurprisingly, given the excessive money thrown at the economy, displaying better signs in manufacturing, housing and confidence.

Dollar losses should remain the trend both against the yen but also the European currencies for the time being. It is likely too that for the moment, the yen will probably also make some gains against the European currencies. However, by the end of September or possibly into October, the dollar will reverse and yen will probably stabilize against the Europeans.

Ian Copsey


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