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Wednesday, July 8, 2009

Yen: Safe Haven, But for How Much Longer?

“Money is gradually being pulled out of risk assets and that benefits the yen. People have been hoping that the world will become a better place after the crisis, and now reality is catching up.” -Geoffrey Yu

FN: The argument that the Japanese Yen was a safe haven used to make sense, but I don't understand it anymore. Before the financial crisis the Yen was a carry currency and the Yen carry trade was massive. So whenever the risk trade anywhere in the world was being scaled back, the Yen would have to go bid. This, coupled with the belief that the Japanese economy was in good shape and somehow 'decoupled' via it's exports to China and the rest of Asia made the Yen a safe haven refuge.

The Yen carry trade is long gone. Now that everybody else has the same "zero interest rate policies" the trade has been unwound. The Japanese economy is absolutely imploding as the fatal flaw in the great export experiment is revealed. No amount of so called "stimulus" at home will make up for evaporating foreign demand, especially after fifteen years of bridges to no where has satiated local demand. Japanese debt to GDP ratio is well over 100% and rising.

Why then is the Yen still considered a safe haven?

Yen Climbs to Six-Week High as Stocks Fall on Recession Concern: "The yen rose to a six-week high against the euro and the dollar as stocks fell and Japanese machinery orders unexpectedly declined, stoking demand for the currency as a refuge from the economic turmoil.

The yen climbed against all 16 of the most-traded currencies for a second day on speculation the worldwide slump will sap corporate profit as earnings season gets under way. The dollar fell for a third day against the Japanese currency on concern the greenback’s role as the world’s reserve currency will be questioned at a Group of Eight meeting starting today.

Investors typically buy the yen as a haven for their cash because Japan’s current-account surplus reduces the country’s dependence on borrowing abroad. The yen has strengthened more than four times as much as any of the 16 most-traded currencies versus the dollar in the past month, according to data compiled by Bloomberg."

FN: Current account surplus? Come on. For how long? The current account consists of the balance of trade, plus net factor income from abroad plus net unilateral transfer from abroad.

Japan Current-Account Surplus Slips for Fourth Month (Update1): "Japan’s current-account surplus narrowed for a fourth month in May as the global recession eroded demand for exports.

The surplus shrank 34.3 percent to 1.302 trillion yen ($13.8 billion) from a year earlier, the Ministry of Finance said in Tokyo today. The median estimate of 20 economists surveyed by Bloomberg News was for 1.5 trillion yen.

Even as China’s stimulus spending has spurred demand for Japanese cars, electronics and machinery, it hasn’t been enough to offset sales declines in other parts of the world. Exports and production have still fallen by about a third from last year’s levels and job losses and pay cuts at home are undermining consumption in the world’s second-largest economy.

“Japan’s current-account surplus will probably stay at a low level in the long run,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “Overseas demand has been slow to recover because sales in the U.S. and Europe remain sluggish despite the pickup in China.”

Exports fell 42.2 percent in May, today’s report showed. Imports slid 43.9 percent.

The slump in imports indicates domestic demand is weak and companies are reluctant to buy materials, Nishioka said. Reports in the past month showed the unemployment rate surged to a five-year high in May and the ratio of jobs to applicants fell to a record low, while big companies said in a central bank survey they plan to cut spending at a faster rate than they predicted earlier this year."

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