Japanese Economic Story – Trading The Yen

I am fascinated by Japan’s economic story – and an absolutely huge fan of trading the Japanese Yen (JPY). In fact, I would attribute the majority of my trading profits over the past few years to trades involving the Yen vs the commodity currencies. The moves are usually quite large, and more importantly for me –  the fundamental story keeps me on the right side of the trade.

Japan’s monetary policy is extremely accommodative and “quantitative easing” is more or less a mainstay. 

The Japanese model is well worth studying, as it serves well as a possible pre cursor to what the Americans may soon expect to see – as a result of their “more than accommodative” monetary policy. Some economists project that the U.S is headed down the exact same path as Japan – and advise that the end result may not be exactly…….what’s desired.

Japan’s debt to GDP ratio is now well over 200% if you can get your head wrapped around that. Interestingly (very interestingly) only 5 % of that debt is held by foreign countries, while around 50% of the U.S debt is currently held by foreign countries. This is where things get interesting.

Japan’s conservative Liberal Democratic Party (LDP) is on track for a stunning victory in Monday’s election, returning to power with hawkish former Prime Minister Shinzo Abe at the helm.

An LDP win would usher in a government committed to a tough stance in a territorial row with China, a pro-nuclear power energy policy despite last year’s Fukushima disaster, and a radical recipe of hyper-easy monetary policy and big fiscal spending to end persistent deflation and tame a strong yen.

Short term I see the Yen sitting at a well-known level of support and in all would favor a bounce here, but with the election panning out as it should –  it’s safe to say that the currency wars will continue as Japan is likely be the next country announcing  further monetary stimulus and easing.

5 Responses

  1. Andrew December 14, 2012 / 8:30 am

    I’m with you on the yen. High five!

    However on Abe, yo have to remember that the BOJ is unlike the Fed. They are somewhat more independent and apolitical, I think. It does not take orders from the Ministry of Finance (MOF) or the PM. All this while, BOJ has been fighting inflation (or what’s left of it!) and more likely the strong yen. As Japan is highly dependent on exports, a strong yen is not particularly good for the Land of the Rising Sun. BOJ has been trying really hard to keep the yen weak as can be seen by their usual news wire threats of intervention, etc. And if the yen is too strong, they will carry out their threat by intervening in the open market as we have seen time and again. However, we all know intervention will not work. So it makes a good play for us. Food for thought.

    • Pot Stock Watch December 14, 2012 / 8:40 am

      Hi Andrew – you’ve got it with Vix as “fear and greed” effect markets differently – I agree…..when things get tricky – Vix will pop for sure.

      I am fully immersed in further Japanese study, and for the most part see the Yen as a “continued player” in my plans moving forward. I think its fascinating that similar problems exist between the U.S and Japan (further easing needed etc) but with such different economic dynamics / circumstances. In some ways (considering Japan’s debt is primarily domestically owned) I find it easier to pull apart and understand the ramifications / implications of monetary policy shifts – as opposed to the U.S. Great stuff all the way around.

      Are you still working at the same place /same location?

      • tradingnymph December 14, 2012 / 1:16 pm

        Japan’s issue is not inflation but deflation. Of course the Election is going to bring in heavy Stimulus , but Yen short is huge in number..along with long Aussie..so a sell the news could set up this weekend, esp if China doesn’t give stimulus stuff out of their Govt meeting this weekend which will start a selling of the aud/usd which is hitting resistance at 1.05817ish. The China PMI FLASH was only .1% beat and the Shanghai Futures in Copper, etc was not giddy like the Shanghai Comp so imho more dead cat then a real better Chinese economy. What I really finally interesting is the tension between Japan and China, they are key trading partners but China is really starting to “hate” on everything from Japan (Tanken confirms that), so China is shifting from Japan to internal for their needs. Japan is such a horrible story, but Japan’s biggest Asset is all of the diverse holdings around the world, I wonder if our Black Swan comes from Japan having to start to sell US Bonds, property, etc to try to prop up their economy???

        • Pot Stock Watch December 14, 2012 / 1:31 pm

          I’ve jumped back on risk related crosses here early morning…..but will just as likely blow them out – although (all green and looking good). I do see they are all well overbought at these levels. Dollar accelerating downward though – and any “fiscal spliff” news over the weekend would put “risk on” right on track.

          I am fixated on Asia in general these days – and am debating just packing my bags! The conflict brewing between Japan and China is very interesting.
          Next week should have some interesting news.

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