Japan and the Yen

by George Hatjoullis

In practice an idea is not ‘good’ unless it is uttered by someone with ‘authority’. In principle an idea is good (or bad) whoever utters it. It is just not heard unless it is from someone with ‘authority’. The false corollary of what happens in practice is that an idea from someone in authority is always at least worthy and heard. So when ‘Mr Yen’, aka Mr Sakakibara, says Dollar/Yen will go to 100 by the end of the year it is worthy of headlines, and news. It is also poorly founded. My own unauthoritative view is that it is more likely to go to 125. Moreover, if it is going to 100 it will not take until the end of the year. It never does.

I am unable to copy and paste good charts anymore so let me describe one that have in front of me. It is a monthly chart of Dollar/Yen. It goes back to 1998. A downward sloping trend line connects some peaks. Dollar/yen broke above this line at around 104 in October 2014. It retested this line at around 99 in June 2016. This retest was also close to the 50% retracement from 76 up to around 125. The moving averages are all pointing up and crossing from below. So why should it retest this trend line again?

Mr Yen says it relates to Trump’s ‘desire’ for a weaker USD. First, the Trump administration has expressed no clear desire for anything. Second, it is fickle and apt to say whatever works at that moment. Third, as I have elaborated in recent blogs, the Trump admin unambiguous policy line implies a stronger USD. So much for authoritative voices. It is after all the same voice that leads lambs to slaughter.

Japan has exhausted every policy option available and still it cannot break its deflationary mentality. Japanese policy makers are about form not content. Perhaps this is inevitable in a society that gives so much weight to consensus and ‘face’. The yield curve manipulation is another example of appearing to be active and ‘clever’ yet fundamentally pointless. It has, as I have said countless times, one meaningful policy option left; monetary financing. It seems unable to use this.

The anti-globalisation, anti-trade, direction of the US hardly favours Japan and the Yen. It may gain some support from more localised trade developments led by China, but then it may not. It may get some support if Japanese investors repatriate their huge overseas holdings of US Dollar assets. But why would they do so? Japan is still a manufacturing nation. But if you enter a Japanese family home you may notice little space for ‘things’ and no inclination to clutter the place with ‘things’. I approve but this does not help boost domestic demand for what Japan makes.