Brave New World

Yen- Further deterioration in safe haven status 09/03/2009

Nothing appears to bode well for the Japanese economy. Figures released this morning showed that the world’s second largest economy and one of the largest exporting nations has racked up a record current account deficit of JPY 172bn. The JPY has traditionally been seen as a safe haven currency, thanks largely to its trade surplus which often focused minds on the currency’s undervaluation. Related to this was the pressure the currency was under during the “golden” era of the carry trade, just a few short years ago. The JPY’s low yield relative to other currencies in times of  global macroeconomic stability and growth, particularly the AUD and NZD meant that retail investors from Japan moved funds out of Japan and institutional investors used it as a funding currency. As sentiment turned, Mrs Watanabe moved her savings back from Auckland to Tokyo and stressed hedge funds needed to square positions and buy yen. That wave of buying pressure on the yen is now over and, in the process, ramped up the price of Japanese exports, which account for a large percentage of GDP, at precisely the time when global demand collapsed in Q4 of last year. The economic picture is severe. The Bank of Japan’s Deputy last week said, “the speed and severity of the decline is something we haven’t experienced in decades.” And this comes from an official who presided over Japan’s “lost decade” in the 1990s. The last few weeks has seen a weakening of the JPY and a loss of its safe haven status. The sense of crisis is not helped by a political system in disarray, with the Prime Minister’s approval rating barely in double figures and the main opposition leader facing corruption charges and refusing to step down. A national election must be called by September.

Key events this week: Tuesday– February CGPI (-1.2 y/y exp) and January machinery orders (-4.5% exp), Wednesday Q4 GDP (12.7% q/a), Friday– Industrial Production