While the currency world continues to focus on the chronic credit problems in the Eurozone sending EUR/USD on endless roller coaster ride as investor sentiment swings between hope and despair, USD/JPY very quietly, in a very stealthy fashion has managed to break above the 80.00 level for first time in more than a month.

Undoubtedly, over the past several years the two prior breakouts above the 80.00 figure turned into fake outs as the rally in the pair fizzled out sending it back into the 70’s. However there is reason to believe that third time is the charm in USD/JPY as the current rally in the pair may suggest a tectonic shift in the market’s attitude towards Japan’s financial condition.

One the greatest ironies in recent currency trade is that the G-3 nation with the largest debt to GDP ratio has enjoyed the strongest currency amongst majors. Although investors continue to fret about EZ sovereign debt financing, the fact of the matter is that Japan sports a much larger debt to GDP ratio than either Europe or US exceeding 200% of it annual economic output. Yet despite this precarious financial condition the yen has done nothing but rally since the global credit crisis of 2008 as investors viewed the currency as a safe haven play. The reason for yen’s strength could be explained by one simple fact – the Japanese economy because of its export oriented nature has been a massive generator of surplus capital. Yet ever since the Fukushima nuclear disaster the country vaunted export engine has sputtered and Japan recorded 14 consecutive months of trade deficits.

To be sure, Japan’s trade deficits are relatively small and largely a function of its need to import energy after suspension of its nuclear production port-Fukushima. Nevertheless, the country’s balance of trade has turned sharply negative and the market may just be starting to appreciate its impact on the yen.

The situation is exacerbated by the recent developments in the Japanese Diet. The ruling DPJ party which came into power only three years ago after defeating LDP which held control of Japanese policy for more than 50 years, now find itself in a power struggle of its own. The DPJ Prime Minister Yoshihiko Noda is trying to pass through a consumption tax that could double from 5% to 10% within two years. The move is intended to close the financing gap in the Japanese budget which is becoming increasingly more difficult to do as the country fails to earn enough capital from abroad. Yet this proposal is vehemently opposed by large faction of DPJ legislators who feel that that is a complete betrayal of the party’s promises to the voters to not raise taxes.

Former Democratic Party of Japan leader Ichiro Ozawa has been collecting letters of resignation from his supporters within the ruling party, with dozens having already signed, threatening to split up the DPJ. That would turn Mr. Noda’s administration into a minority government and could make it vulnerable to a no confidence vote forcing a snap general election.

Currency markets generally abhor any kind of power vacuum and do not like political instability . Therefore if events this week turn into a crisis of confidence, the yen could weaken further as markets the political and economic implications of the situation in Japan. After years of being viewed as sound money, the yen may suddenly begin to lose its luster as a bastion of safety and the rally in USD/JPY could accelerate towards the next level of resistance at 85.00.


  1. adrian says:

    If yen is loosing its safe heaven currency tittle and may depreciate against us dollar, in a world where economic agents are very sensitive towards bad news that may spread risk aversion I think there’s no much to choose regarding SH currencies, because chf is in danger of getting stronger and swiss policy makers are burning their ammunitions to hold the chf. Then if the chrona apreciate in an economy that has its own difficulties, people willsooner or later relized that it might loose it’s SH tittle either. So only us dollar will be a SH currency. But what about us economy? So…

  2. josh says:

    the USD is in no better shape with the rampant debasement and the upcoming fiscal cliff. imo, if the JPY falls, it won’t be against the USD

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