Is This Currency About to Crash?

government bondsWhen it comes to currency trading right now, there is one country’s currency that that has moved very substantially. You might be thinking that, with all of the turmoil in Europe, I would be referring to the euro, but I’m not. In fact, I’m talking about the Japanese yen. I wrote an article on December 22, 2011, called Should You Bet on a Euro Squeeze Against the U.S. Dollar?, in which I outlined that, when it comes to currency trading, there are many things to consider, not just the current credit crisis in Europe.

There are many players when it comes to currency trading. Some of the largest currency trading participants are buyers of government bonds. We all know how difficult the European situation has been recently regarding its government bonds, so many new participants to currency trading might think that the euro should go down against every other currency. It’s not always that simple.

A credit crisis will always scare investors out of government bonds and therefore they would sell and engage in currency trading. Speculators also try to determine what’s most likely in the market and are participants in currency trading, even if they aren’t necessarily investors in government bonds. Traders can see a credit crisis building and actively trade to get ahead of the slower crowd of investors, some of whom are still holding government bonds.

Active currency trading will be a very big part of the markets over the next couple of years, as Japan is about to enter its own credit crisis.Japan has been fortunate over the last couple of decades in that its own citizens were the biggest buyers of the country’s own government bonds. A former senior Ministry of Finance official in Japan stated his belief that, within the next couple of years,Japan will need inflows of foreign capital to buy its government bonds.


This is when the situation will get tough for Japan and the price of its government bonds. Bond investors, who have a big effect on currency trading, will demand more yield for their money, which means higher costs for the government. Current yields on 10-year Japanese bonds are at less than one percent. Considering Japan has the highest debt load of any developed nation, bonds investors would certainly demand a higher yield for their government bonds.

This is in addition to the stated goal of the Bank of Japan and the government in general to lower the value of the yen, as the country’s currency strength has hurt exporters. This implicit goal will push traders out of the yen, changing the nature of currency trading over the next few years.

While Greece might appear to be a big deal, the nation is tiny compared toJapan.Greece’s GDP is approximately $305 billion, while Japan’s GDP is just under $5.5 trillion, all in U.S. dollars.

Even with the negativity of the credit crisis in Europe, since my article on December 22, the euro was valued at 1.3054 against the U.S. dollar and it reached a high of 1.3485 just a couple of days ago. The Japanese yen, meanwhile, weakened significantly from 78.16 for every U.S. dollar to a recent low of 81.87. This yen weakness will continue for some time and many including myself believe that the yen will weaken to 100 for every U.S. dollar and perhaps even 150 is attainable within the next few years.