Can the Japanese Yen Recover?
For the first time in nearly four years, it looks like the Japanese yen could end the year higher than it began. It’s not entirely clear what this means for the Japanese economy, but there’s one thing we can say with confidence: the yen to USD is probably going to skyrocket.
At long last, the dynamics between Washington DC and Tokyo are changing. A lot of really smart folks are talking about the yen to USD reversing its current trend. I certainly think that’s right, but you should really know why it’s happening. (Source: “Japan’s Three Biggest Banks Declare Yen’s Depreciation Is Over,” Bloomberg, March 1, 2016.)
It could affect the entire forex market in the coming months.
Basically, the second half of 2015 was completely distorted by the possibility of a rate hike by the Federal Reserve. Those expectations drove up the U.S. dollar relative to other currencies, which made perfect sense at the time.
Years of quantitative easing had kept the currency artificially low.
Now it was being unleashed, untethered from the anchor of easy money. It turned out we were right. The dollar rose, as predicted, during the run-up to the December rate hike.
Since then, the global economy has slowed considerably, so we’re no longer expecting a follow-up rate hike in 2016. That’s obviously going to reverse some of the dollar’s gains, but it wouldn’t be anything worth writing home about—except that Japan is headed in the opposite direction.
The yen to USD is already up more than five percent since the start of 2016.
All of the country’s banks are expecting the easy money to stop flowing this year, prompting a rise in the value of the Japanese yen. But there’s more to it than just monetary policy. Markets are growing extremely volatile and there are few places of safety remaining for investors. The Japanese yen is providing a safe haven for their capital.
Negative interest rates aren’t hurting the yen to USD.
Currency analysts are incredibly surprised by what they’re seeing. The Bank of Japan shocked us all in January when it let its interest rates fall into negative territory. However, this move hasn’t weighed on the yen at all. In fact, it’s done the opposite; it’s shown just how stupid negative rates are.
To put it simply, markets are ignoring the negative rates. Everything we’ve seen this year points to a higher yen to USD exchange rate, but I’d hurry up and take a closer look before all the big gains are gone.