They call it the widow maker for a reason. For as long as I have been in finance, every sane Western finance guy has marveled at the ability of the Japanese Yen to continue to levitate. Repeatedly, investors have tried to short the Yen and been run over. It is unforgiving and it is relentless and it simply defies reason.
To summarize the problems that Japan and the Yen face;
–Government debt is more than twice the GDP
–Annual government deficits currently run at roughly 10% of GDP
–Interest expenses are now at half of total tax revenue
–The worst demographics of any country I can find data on
–A no growth economy with an overleveraged financial sector
–Current account deficits predicted in the near future
–Trade balance is currently in deficit
If you want to learn more, read some of these well written pieces. There is no need for me to repeat their work. There are plenty of bearish Yen articles out there.
Anyone with a rudimentary understanding of economics would understand that Japan should have a weaker Yen. More importantly, Japanese companies need a weaker Yen and need it now. The continual strengthening of the Yen has simply gutted companies. However, you could have said the same things for the past decade and be proven wrong. I’ve been reading dire warnings for Japan almost since I started in finance. Despite it all, the Yen has continued to appreciate.
Yesterday that all changed?
–Abe calls for unlimited BOJ easing until deflation is overcome
–Abe reiterates call for BOJ inflation target of up to 3%
–Abe wants BOJ benchmark rate cut to zero or lower
–Abe says he will increase public investment if LDP takes power
These are the headlines that rolled across my screen last night. Who is Abe? Following the election in December, Shinzo Abe is likely to be the next Japanese Prime Minister and he seems focused on weakening the Yen. Will he succeed? Any country can lower the value of their currency if they want it. Abe wants it. Japan needs it.
One of the great truisms of finance is that a trend in motion will remain in motion for substantially longer than any analytical person thinks is possible. When the trend does change, it is gradual, then VERY sudden. We’ve spent about two years on the gradual part—now it’s time for the VERY sudden realignment. Shinzo Abe is waging an election campaign based on weakening the Yen. Once in power, I think he will follow through on a substantial weakening of the Yen. I’ve been short Yen since the beginning of the year. Last night I added substantially to my position. The coming election in Japan is likely to lead to a radical departure from past Japanese monetary policy. If they want a weaker Yen, I think they’ll get it.