Part of the reason for the Japanese yen‘s decline was short covering. But Japan’s investment outflow data showed that Japanese investors’ net purchases of foreign securities were quite high, even as the dollar fell.
Sooner or later, it will all happen: currency markets will ignore the problems the US faces in financing its current account deficit and the slump in US equities, and instead focus on the rest of the world. Japan appears to have been particularly noteworthy since last Friday, though interest has focused on the negative. The yen is trading lower against the euro, pound, Swiss franc, Australian dollar, Canadian dollar and New Zealand dollar. In any case, it is the yen, not the dollar, that has fallen against all major currencies in the currency market.
To be honest, there is not much news that the foreign exchange market has found new evidence to hit the yen. Part of the reason for the yen’s decline was short covering. The dollar is no longer slipping, so investors and some institutions find themselves over-hedging, while speculators see an opportunity. But frankly, the export volume that drove Japan’s government and central bank to raise their economic outlook for five straight months is also looking increasingly precarious as global demand conditions start to worry again.
Of course, the recent appreciation of the yen has become increasingly detrimental to exports, and the decline in US consumer confidence may explain why Japan’s exports to the US have declined. On Monday, Japan announced that industrial production fell last month from the previous month.
We have always been puzzled by the view that Japan is a better place to invest than the United States. Sure, some speculators will be short-term in Japanese stocks or government bonds, but who will be in the long-term? A foreign company seeking a new market might do so. But this is the exception. Yes, Japan has a huge trade surplus and exporters have foreign currency to sell. But Japanese investors want to buy higher-yielding foreign assets and sell the yen. Undoubtedly, Japanese appetite for foreign assets has waned in recent years as a “trapped” mentality has taken over Japanese households and businesses due to persistent deflation. Dan Day
Even with the dollar lower, Japanese investors’ net purchases of foreign securities are quite high, according to Ben’s investment outflow data.
Also, it is worth noting that the U.S. Treasury is no longer calling for reform of the Bank of Japan, perhaps because it is exhausted, and Prime Minister Junichiro Koizumi cannot deliver on his promises. So why bother with this, the end result always disappoints financial markets anyway. For now, Junichiro Koizumi appears to be trying to scrap a plan to scrap the government’s blanket guarantee of bank deposits, which is due to end in April next year. Why give up now? Because banks are now too weak to withstand a run on a deposit guarantee cap of 10 million yen, or $84,000. Japanese media reported that Koizumi has asked the Liberal Democratic Party to come up with a way to provide comprehensive guarantees for depositors. Lo and behold, this is the reformer.
There is also the view that the dollar’s weakening against the yen is partly due to companies such as Enron, Worldcom, Global Crossing, and Qwest that have damaged U.S. accounting standards. This is utterly ridiculous, as if Japanese accounting practices are flawless.
Remember, this article is not encouraging investors to dump the yen without thinking. We know that the foreign exchange market suffers from “ADHD”, and important things become unimportant after a while. But selling the yen isn’t a bad idea in the short-term when markets are hesitant to see the dollar and U.S. stocks fall. First, sell the yen when the exchange rate of the yen is close to the falling resistance level of 1 US dollar to 121 yen, and then sell the yen when the exchange rate of the yen falls to about 1 US dollar to 122 yen, which is the price of the yen from 3 this year. The month’s highs are down about 38%. If you’re wary of buying dollars while you’re selling yen, try buying euros when the euro breaks above 119.70 yen, the highs the euro hit in January.