Despite the Bank of Japan’s (BoJ) negative rates, the Japanese yen keeps getting stronger. The USD/JPY pair has not moved; neither has inflation. On February 9, the Tokyo Stock Exchange fell sharply, losing some 5.4% of its value. The Nikkei fell 918.86 points under the weight of the banking sector. The TOPIX (index of listed companies on the Tokyo Stock Exchange) dropped 76.08 points. That means 5.51%.
The yen is to blame for the dramatic drop. The JPY is simply too string and no amount of interest rate sorcery can stop it. The yen is one of the safe havens of choice in turbulent times. Indeed, the USD/JPY is at its highest level since November 2014: the dollar has fallen below 115 yen for the first time in over a year. The euro also lost to the JPY. It was trading at 128.56 yen against 130.71 yen on the previous close.
The JPY lived up to its reputation as a refuge for weary stock investors. Wall Street had a moping session. The Dow Jones lost 177.92 points (1.10%) to 16,027.05 points. The S&P 500, lost 26.61 points (1.42%) and the NASDAQ Composite lost 79.39 points (1.82%). As Europe flounders in uncertainty, fueled by another Greek crisis, the JPY looks better than ever.
Stock markets had a disastrous start to the year. Between the economic slowdown in China and the low oil prices, the specter of a bear market has spooked investors. The USD/JPY relationship and the BoJ’s failure to stimulate growth carry consequences for the global markets as well.
Zero rates represented the last attempt to stimulate industrial growth, exports, and domestic consumption. If any further evidence were needed, the Fed has even fewer incentives to raise interest rates again this year. Any hike would make Japanese goods too competitive. The yen has resisted all efforts to lower the USD/JPY exchange rate. This is the opposite effect that the government stimulus plan, dubbed “Abenomics” after Japanese Prime Minister Shinzo Abe, intended.
It seems Japan is suffering from the same malaise affecting China, a notion corroborated by the rise of debt. In other words, in 2016, both Japan and China could face a recession, if not an outright economic collapse. The contagion will spread quickly to the rest of the world, making a U.S. stock market crash inevitable. Or, it may just be that Japan is in a recession. The problem is that the yen seems to gather strength regardless of what the BoJ or equities do.
The yen can rise in international markets regardless of how the indices of the world’s main stock exchanges move. When Janet Yellen raised interest rates, the yen gained popularity with the risk-averse crowd. Yet, last December, as some riskier assets including stocks were gaining, the yen was still rising. This defies the usual inverse correlation between currency and stock exchanges.