Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Netflix - FAANG a Buy, Sell or Hold?, CME Black Swans Chasing Value in Biotech Stocks - 5th Aug 21
We Will See SPX 4600 In 2021 - 5th Aug 21
Revisiting The Excess Phase Stock Market Peak Pattern - 5th Aug 21
Dramatic Divergence between US and European Stock Markets - 5th Aug 21
Budgie Clipped Wings, How Long Before Flight Feathers Grow Back After Clipping, 4 Week Update - 5th Aug 21
Lisa Su's AMD Stock Price Rockets to the Moon! $200 Target, How to Buy for Under $78 - 4th Aug 21
Gold Jumps for Joy Only to Hit the Ceiling… Hard - 4th Aug 21
Is Wise Really The King of Online Money Transfer Services? - 4th Aug 21
Tips for Investing Your Money in Stocks - The Ultimate Guide - 4th Aug 21
Gold is the Key to Financial Wisdom - 4th Aug 21
How to Trade Binance Vanilla Options for the First Time on Bitcoin Crypto's - 2nd Aug 21
From vaccine inequality to economic apartheid - 2nd Aug 21
Stock Market Intermediate Top Reached - 2nd Aug 21
Gold at a Crossroads of Hawkish Fed and High Inflation - 2nd Aug 21
Bitcoin, Crypto Market Black Swans from Google to Obsolescence - 1st Aug 21
Gold Stocks Autumn Rally - 1st Aug 21
Earn Upto 6% Interest Rate on USD Cash Deposits with Binance Crypto Exchange USDC amd BUSD - 1st Aug 21
Vuze XR VR 3D Camera Takes Near 2 Minutes to Turn On, Buggy Firmware - 1st Aug 21
Sun EXPLODES! Goes SuperNova! Will Any planets Survive? Jupiter? Pluto? - 1st Aug 21
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Biggest Ever Yen Intervention, 25% Over Valued Agains the Dollar

Currencies / Japanese Yen Sep 19, 2010 - 10:42 AM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleLast week, I pointed to the challenges facing Switzerland and Japan’s currencies. As for the yen, I said that nothing short of actual intervention would relieve the pressure on its exporters. I also said that I expected it to happen.

And it did.


Japan intervened this week to stop the ever-rising yen, its biggest one-day intervention on record. But many in the foreign exchange market believe the effort will fail — and ultimately a strong yen will win out.

I disagree.

First, I can’t think of one fundamental argument that would support the case for a stronger yen.

Second, Japan has every incentive to keep intervening.

Remember, this is a country attempting to weaken its currency, not save it from a death spiral of weakness.

Given that fact, unilateral currency market intervention by Japan works in their favor in several ways …

It softens the currency burden for its all-important exporters.

And it requires Japan to print more and more yen, ultimately easing monetary policy even further. Indeed, a move needed in Japan’s fight against another round of deflation.

So what do they do with all of the freshly printed yen?

They sell it and buy U.S. dollars. That means they stockpile currency reserves … an area commonly perceived to be a gauge of a country’s financial wealth and stability.

Perhaps even more favorable: It’s a politically-positive move. For a country that’s had six prime ministers in the past five years — nearly seven in the wake of last week’s elections — stepping up to the plate to weaken the yen is a political win.

Why Japan’s Intervention Will Work

Because of the incentives I discussed above, I expect Japan’s efforts to persist and pay off. But when you add in four more pieces of supportive evidence, the case is even stronger that we may have seen a long-term top in the yen.

Supportive Evidence A: The yen is way overvalued

Below is the OECD’s measure of the most overvalued currencies based on Purchasing Price Parity (PPP). As you can see the yen is among the most overvalued currencies in the world, more than 25 percent too rich against the dollar.

chart1 Biggest Ever Yen Intervention   and What It Means for You!

Supportive Evidence B: The long yen trade is overcrowded

The chart below shows the massive build up of long positions in the yen, a dynamic that typically doesn’t end well for those on the side of an extremely overcrowded position once the selling begins.

chart2 Biggest Ever Yen Intervention   and What It Means for You!

Source: Bloomberg

Supportive Evidence C: History of successful intervention

The only other time the yen was this strong against the dollar was in 1995. The yen traded as high as 79.75 against the dollar before the Bank of Japan stepped in, sending it 46 percent lower over the next three years … and in the process marking the all-time high for the yen.

Supportive Evidence D: Debt, debt and more debt

Japan’s debt load is twice the size of its economy. The Bank of International Settlements projects that by 2040 it will reach 400 percent of GDP.

As I detailed in my May 15 Money and Markets column, Japan: The Sleeping Sovereign Debt Giant, Japan faces big structural shifts that will likely make it difficult to internally finance its debt much longer. It will soon have to start competing for international capital to fund its debt. And given its non-competitive interest rates, that raises the specter of default.

A weaker yen could force other nations to follow.
A weaker yen could force other nations to follow.

In fact, Standard and Poor’s said this week the risk of a sovereign debt default in Japan is “slowly increasing.” This fundamental problem in Japan will ultimately result in a much weaker yen.

What Does this Mean For the Rest of the World?

Japan’s intervention could be just the first step in a long, sharp devaluation of the yen. And in a world where unsustainable debt and deficits are prevalent and economies are fragile, this could ignite a wave of currency devaluations in other countries.

Already, Japan’s move has started speculation that countries like South Korea, Singapore and Thailand could follow suit.

Bottom line: This intervention could mark the beginning of increased global currency risk, another round of capital flight from high-risk currencies and another, more sustained, period of global risk-aversion.

Regards,

Bryan

P.S. For more news on what’s going on in the currency markets, be sure to check out my blog, Currencies Corner. You can follow me on Twitter, too, and get notified the moment I post a new message.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

kuzotz
30 Dec 10, 05:11
you disagree?!?!?

The strong yen has won out, so now what?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in