The Debts of the Lenders: The Yen Losing Safe Haven Status?

The BOJ's efforts to debase the Yen are finally paying off. The yen continues to slip against the dollar w/the Yen trading above 97, a three-month high. The yen has reversed course from its overbought levels as fears mount over the health of the Japanese economy.


The recent weakness is also due to FUNDAMENTAL fears of Japan's growing trade deficit. In a export dependent island nation w/few natural resources, the shrinking of international trade is signalling alarm bells among both traders and policymakers.

"Exports to Asia slumped at a record pace as manufacturing within Asia, which
had thrived on robust global growth until last year, slumped as Western consumers curtail their spending."

"Exports plunged a record 45.7 percent in January from a year earlier, Ministry of Finance data showed on Wednesday, roughly matching a median market forecast. The month was also affected by the Lunar New Year, during which some Asian export markets were closed for several days.

Source: http://www.iht.com/articles/2009/02/25/business/25yen.php

For the foreseeable future, we can expect to see a vicious tug-of-war between
foreigners selling and public funds buying. While the exporter dominated Nikkei has been boosted by recent yen weakness, it seems unlikely that any REAL buying activity is occurring beyond short covering and BOJ purchases of individual stocks.

Yes, you read that last part correctly.

The Japanese authorities have decided that the best use of taxpayer money is to purchase shares of select Nikkei stocks in order to provide a floor on the share prices of stocks.

http://www.reuters.com/article/marketsNews/idUST33290820090203

So much for the free market. And I thought US short sellers liked to complain about the PPT. Imagine being a Japanese short seller and being forced to work in such a manipulated environment.

If the government continues to promote such interventionist policies, then liquidity will simply dry up w/fewer shorts around to cover. This will eventually be wider gaps between bid and ask spreads and possibly ripen into a similar situation like last autumn.

It appears that the Japanese authorities have succeeded in their goal of weakening the yen. But at a steep cost.