Japan... are they really this weak?

When one examines the JPY against all the crosses, AUD, GBP, EUR, etc, we are seeing the values at record highs across the board.

Does anybody know the economics of Japan well enough to say that the weakness of their currency merits all of these crosses at such extreme values. Are we seeing the results of carry trading? If so, how long can it last? Will it crash once Japan decides to add some interest to their currency? Or does Japan not really mind their currency so weak because it keeps up exports?

Eur/Jpy is up 1500 points in 1 year with almost a non-stop raise. Economics and price action tells us that what goes up usually comes down. How do you feel about this? Are we still going to see more record highs as long as eur and gbp go up against the usd? (that would be what I would figure). But is all this upwards momentum on the eur and gbp speculative buying or do we really have this much strength in europe and that much weakness in the U.S.?

Seems to me that sooner or later, unless the European big boys don't mind having every other country in the world not be able to afford European products, this run is going to have to cool off soon.

Penny for your thoughts everyone?

GirlFlyer

I think they do want a weak currency more specially to boost their exports in the short term,wich is enough for a reason.

seems similar to perception of US when fed funds rate was at 1%. nothing but doom and gloom on horizon. i don't believe JPY is that weak, i think combo of carry trades and heavy exporting is contributing to weakness against other currencies, but their economy is on the upswing, just like ours was and is after digging out of dotcom bust and 9/11 hole for the last five-six years. imho

Actually this trend started much more than a year ago. It actually started around June 2000 when the pair was at 87.80. In other words in about 6 1/2 years it has gone up 9700 pips or so. Don't you wish you have opened a long position then--9700 pips plus daily interest.

The story with GBP/JPY is similar.

We always think that what goes up must come down, eventually anyway, but these pairs really make me wonder about that. Apart from retracements and minor counter trend moves, these pairs have been steadingly trending upward for over 6 years. Logically they cannot keep going up forever, but it certainly looks as though they are going to try.

The reason would have to be the desire of Japan to keep selling their exports. What is less clear is why the other countries would tolerate this since Japan and its currency would appear to be much sounder than the yen crosses seem to be. The fact tha carry trades benefit from a pair going up or at least staying relatively stable, is most likely a contributing factour.

Japanese companys export superior material iron plates(these make into car...etc...) , many patents and capital.Now the export competitiveness do not be influenced by appreciation yen or depreciation of the yen,I think.

This picture is front office built TOYOTA in Nagoya,Japan last autumn.

girlflyer i like your post. does anyone know a good economist that can answer this one?

actually, i've been searching for a good fundamental service lately, because i have the same types of questions when i want a "big picture" outlook of a pair.

i guess my final thought on this is.... sometimes things just go way up..... your logical mind can say "it can't go any higher... it's gone far enough to peak....." but then you see cases such as google.

http://finance.yahoo.com/q/bc?s=GOOG...l=on&z=l&q=c&c=

lets see alot of people are looking to buy cooper in europe cause prises in asia is not yhay cheap anymore


revoke

Google is one of those rare ones in the stock market. You don't see many of these anymore, but it reminds me of the dot-com bubble burst a few years back. Once Google reaches a certain point where its growth becomes limited and profits become steady, etc., the steam will go out of it.

When I go back and look at JPY for the currencies, historically the JPY has been much weaker against various currencies than even what it is now. Values of GBP/JPY approached 580 in the 1980's, but that was when the USD was also at its height of value, too. So, I see 230 on GBP/JPY today, and say well, historically it could go back to 580 again. Haha... like the markets are going to let that happen anytime soon. I think the forex markets are now so large in volume that those days are probably over and will never be seen again in our lifetimes. Barring a major upheaval in the economic conditions of the world, its just not going to happen. We are too much of a global economy now. Every country in the world is interrelated much more than it was in the 1980's. Imports/exports drive the value of currencies along with the respective interest rates of each nation and various other underlying fundamentals.

So how long can Japan afford to let its currency just devalue? Sure its great for exports, but Japan suddenly can't afford to import any longer. And imports are crucial to an island economy. Japan doesn't have the economic resources to sustain itself without buying from the outside (look at its need for oil). This recent drop off of the top in the JPY just serves to reinforce my belief that it is nearing a peak. If the value of the JPY continues to weaken further, Japan is going to start seeing the inflation it has been looking for because the prices of imports are going to go up dramatically which then in turn gets passed on to the consumer, etc. etc. and then inflation goes up, and then interest rates go up, all of the sudden everybody will be buying JPY instead of selling it.

Of course we see all these fundamentals, but until the actual price action relates to what we see here, we have to go with what is really happening.

GirlFlyer

yea this is an interesting question; ive been watching eur/jpy as of late myself and while its best to let the big boys slug these things out and just be there to jump on when one side gets knocked down, its nice to be think and be prepared for these kind of big, long term moves.
personally, ive been long on eur/jpy with a tiny amount since late july 06, and while i will probably close it out before boj raises their rate, with forex i dont believe there are ceilings or floors in the same way that with a stock you could say that 'p/e ratio is out of hand'. japan has been treading water for years now. like you intimated, we have to remember the real effective exchange rate: even if their exports increase, they must increase faster than currency is devalued in order to have an effect, and if i look at the numbers, they've paced each other closely enough; the trend has been allowed to continue because its only now starting to give japan signs of growth. on the technical side of things, the eur/jpy and usd/jpy are close to very significant resistance levels, but even if japan raises interest rates in the next year, theres a good chance that ecb will as well, so the bleeding against eur will likely continue, even if it slows dramatically. but theres also the flipside: is the euro really this strong? im not so certain... it seems like their juice has to run out sometime in the next year or two as the accelerated rate of buying eur reserves by central banks slows. and are there never typhoons or earthquakes or anything in the euro zone ??
i guess well just have to watch closely when boj raises rates over the year in addition to abes success/failure at reform and whether a slowdown in the u.s. economy is imminent. im thinking by year end the eur/jpy is just slightly higher, but under 160 and usd/jpy is slightly lower than where it is now, but greater than 110. this might place eur/usd around 1.40. just conjecture, as japan's resumption in growth and a u.s. slowdown (and the corresponding interest rate moves) arent carved in stone.

I'm short EURJPY from 15548 from Friday and agree that it is likely to fall hard. The YEN I believe is artifically low. The Japanese Government does all it can to keep the YEN low. Every now and then the pressure becomes too great and YEN recoils hard and fast. I'm trading every (EURJPY) short signal I get while in this cycle. Several years back it went through a similar cycle. Also I see 2007 as a year of high volatility for all currencies. Could see some wild rides!

ctgfutures

What makes you think high volatility for 2007?

Currency option premiums are higher than they have been in some time.
A good measure of volatility. The other market I watch closely is the US Dollar index - it traded a 10 point range in 2006. I believe that this year it will break out of this tight range. I'm suspecting it will go lower but the jury is still out. Either way when the range cracks I expect some drastic moves.

It is important for me to read your opinions at Forex Factory.
Because Japanese journalism(almost the left wing) envy wealth,report partiality,so it is difficult for us in Japan to know the real state of things
(we read a report written by Japanese international economist in particular once a week).

Now many high-profile project is making rapid progress in the world.And the liquidity demands will increase further depending on big projects developments.
Japanese companies export capital goods and production goods.The buyer are companies, not a private individual.Big excavator,Press machine,bigger pipe through oil...etc...whether the yen-denominated prices is higher than dollar-denominated prices by rising in the yen's value, they cannot but buy these superior production goods.If they want to win at competitive edge.
For example,MITSUBISHI HEAVY INDUSTRIES is the only organization to produce such a large range of supplies for nuclear power generation.

I read "The whereabouts of the Japanese revived economy" written by Keitaro Hasegawa on December.He wrote that Japanese have forgotten the existence of money interest since collapse of the bubble economy,zero-interest.
Japan is under the rule of bureaucratism (bureaucratic government).This means the Prime minister cannot solve the large government deficit easily whether the central bank will want to hike interest.
We wish buy large amount of USDJPY,EURJPY,GBPJPY after appreciating yen.

This picture is TOYOTA's factory.Higher buillding than TOYOTA cannot exist in Toyota City.

No, Japan is not this weak at all. The central bank in Japan takes serious consideration to keep currency value competitive relative to China. Japan has no problem letting USD appreciate but watch like a hawk is its own currency goes up. BoJ intervention is huge. Carry trade on the other hand is another issue. EUR/JPY is all about the carry trade, once either party decides to raise interest rates, it will have a good amount of volitility. When BoJ decides on interest rates, it is usually a one shot deal, done and done for sometime. This situation depends on who blinks first. If EUR is going to cut interest rates (unlikely) or if BoJ is going to raise interest rates (very likely and even expected very soon). Remember, Japan has many ways to control inflation, not just by raising interest rates. To cut short of the money supply, Japan can issue treasury notes, increase the base percentage of reserve holdings, impose laws on investing, etc...

The change in monetary policy last.. ermm. February was it? Was a big mistake for the japanese economy. After they did that, the move started on the up. So in my opinion, they are week. And will remain week, until their interest rates are over 2%

This is a start on a thread about economic news and analysis:

http://www.forexfactory.com/forexfor...ad.php?t=11943

And I would think that there's an even more complete thread on the same topic in FF someplace.

Here are my thoughts about the Japanese economy. I am not a econ pro so remember to do lots of your own research too:

1. Inflation in Japan is practically non existent still. Today, prices are virtually the same as they were (measured by CPI) five years ago. Right now, the economy is printing .2% CPI year on year. Compare that with CPI numbers over 2% in the US and n the UK, about 1.9% in the EUR zone. In fact, year on year CPI has even decreased recently in Japan in some of the reports in 2006. If inflation is as low as this, how can the Bank of Japan raise rates? Maybe they will, but the thought process with many interviewed traders is that if deflation is the bigger concern, then a rate hike is less likely, and that means that the JPY will just continue to weaken continually.

2. Fukui (BOJ Governor) has already ended the ZIRP (zero interest rate policy) but he's not expected to be a madman and drive the economy into the toilet (from interviews that you can read across the Web if you do Google searches on him) by just raising rates all over the place. There is talk that by the end of the JPY fiscal year (March 31) there will be another hike. That might just be talk, of course. The next rate decision is coming soon on January 17.

3. The Tankan survey, which seems even more influential on the BOJ than inflation, is ticking upward. Business confidence, business expenditures -- both are up. The last reading was a 25, which was up one point from the last survey. If this manufacturing survey continues to print stronger and stronger numbers, it is likely we're going to see another rate hike in 2007. Even if it's just 25 basis points, almost everyone I have read, talked to, etc seems to believe at least ONE hike is coming.

4. Japanese consumer spending is still anemic. Why? Wages in Japan are not increasing quickly at all. Business are earning more but doing little to pass that onto workers. This has led to a year on year decrease in consumer spending every month in 2006. But ... and this is some good news -- it seems that the pace of the decline in spending is at least slowing. Consider that if consumers finally start to spend more in a month than they did a year ago -- we can start to see demand for stuff increasing, and that can lead to stronger manufacturing activity and confidence (the Tankan), and then prices could start going up more quickly, and that leads to BOJ rate hikes.

5. This is just interesting to me, but I think you might find this as fascinating as I do -- the savings rate in Japan has gone from 10% like 7-10 years ago to about 2.5% in 2006. There is a lot of talk about how the savings rates in Asia are higher than in the US, but 2.5% isn't going to win Japan any awards. Maybe if their savings rate is declining like this, we could see more spending! And then spending leads to increased manufacturing, which leads to business prosperity, which leads to demands for higher wages, and so on.

6. I think GDP is annualized at about 2% and most recently gave a strong reading, even better than expected.

6. One thing that I try to keep in mind is that even if the BOJ raises rates by 1%, that only takes the base rate (called the Discount Rate in Japan) to 1.25% or so. And the base rate in the US is 5.25%. In Australia, it's 6.25%. In EUR-zone it's 3.5%. In the UK it's 5%. If the rise in other currencies vs. the JPY is based in large part on this interest rate differential -- the carry -- we still have to see more rate hikes in Japan and some rate decreases in other parts of the world.

In the end, we can say two main things:

Businesses seem to be prospering (GDP / Tankan) but it's not resulting in higher prices or wages just yet. Until we have a combination of expanding economy and higher prices we are not going to see steady rate hikes by the BOJ.

At the same time, the interest rate differential can be an important, dominant focus with traders. As interest rate changes become more uncertain, there will be much greater volatility in the trading ranges of the JPY pairs - just look back to December 12, 2005 on the GBPJPY for an example of what happens when carry traders get worried about interest rates and taking profits while they can.

This is going to be the year that the Japanese economy either fires on all cylinders or it just can't seem to grow fast or strong enough to cause price increases. They've been battling deflation for 5+ years now and this is really going to be a critical year in the recovery. We're at the bottom of the interest rates in Japan, but around the other parts of the world (AUD, USD, GBP) we're nearing the peak. Only the EUR zone seems to be threatening possible higher rates.

I hope some of this helps. Economics is fascinating. I'm no pro at this at all, as I said, but I do love to discuss it. Thanks for starting this thread!

Hi robbooker,

I read your description with admiration.

Please excuse me for grammatical error and mistranslation. We can study all knowledges in my mother tongue(Japanese), I usually do not speak(use) in English.

Japanese consumers have every durable consumer's goods. In deflationary trend, we do not buy new goods unless broken these which we had or saling superior new goods instead of these.So we are interested in fund management.....

Today is "Seijin no hi"(Coming of Age Day) in Japan.

IMHO, no they are not that weak. I believe that JPY will be stronger sooner than later. After 7 years of rising, and the BOJ buying up 1 trillion yen/month, the bubble against the yen will burst.

Some of the previous posts on this thread are signposts to the sea change.

Also re the google comment, that was a true anomaly in the US market, and has no bearing on the yen's subsequent rebound.

My thought is that we see GBP/JPY at 225 or so within 30 days.

But you never know.

I think it's better to hang in with the shorts than taking it in the shorts, notwithstanding some short term trending ala last week.

Cheers,
Cortez

I agree...

I suspect that there could be some sort of "China factor" at work here behind the scenes as Japan is probably coming to grips with the fact that they have a new uber-competitor to contend with.

More short-term, I believe these carry-trades are going to just keep on trucking until they're derailed by fundamental interest rate adjustments (or the rumors thereof).

But when those prices fall - they're not packing a parachute! Don't be too far away from your computer.