In-depth Analysis

The continuous freefall of the Yen

The Japanese yen is in freefall!

Now that’s not the kind of comment you often write about a reserve currency and an FX major. However, in this instance it’s true.

As I write the Yen is down by almost -1.50% against the USD and has been much lower on the day. In fact, it traded at 125.09 this morning, which is a new 6-year low against the greenback.

And though Monday’s moves got everybody talking, the truth is that the yen has been on the slide for several months.

The chart above plots the 5,30 and 90-day performance of the yen against a selection of other active currencies, what stands out immediately is that it has lost ground to all of the names, over each of the time frames.

It’s also posted the biggest losses to three commodity currencies, the Brazilian real, the South African rand and the Australian dollar.

Those moves provide a clue about what’s ailing the Japanese currency.

Japan is the third largest single economy in the world, and it only slips to fourth place in the list if, we aggregate EU GDP into one figure.

Japan is also a major manufacturer and exporter and the sector accounted for just over 20.0% of the country’s total GDP in 2019, according to data from Trading Economics.

However, Japan is an island chain that is not blessed with an abundance of natural resources and minerals. And that means that it must rely on imports of raw materials, that its industrial sectors can turn into finished goods for export.

The only problem, commodities are priced in dollars and the weaker the yen, then the more those commodities cost.

This is a chart of the CRB or Commodity Research Bureau Index, which tracks the performance of a basket of commodity prices. As you can see it has been rising sharply since the end of December.

Now let’s add AUDJPY to the chart

And finally, let’s look at the CRB Index overlayed by DXY, the US dollar index.

Can you see a pattern emerging?

One that is self-reinforcing, to the extent that it’s created a vicious circle.

As commodities, priced in dollars rise sharply at the same time that the yen weakens, eroding its purchasing power.

The Japanese yen has long been considered a safe-haven currency. It has reserve status meaning it is held by the world’s central banks. capital historically flowed into the yen at times of crisis because investors felt confident they would get their money back.

Even when the Japanese economy was at its lowest ebb the currency was still able to act as a magnet for capital during risk-off periods.

The Bank of Japan spent years battling this tendency, trying to weaken the yen to benefit the country’s export-led economy. Slashing interest rates to below zero in the process, but all to no avail.

However, with the global supply chain looking fractured and fragile, particularly where energy and commodities are concerned, Japan’s soft underbelly has been exposed for all to see.

The Bank of Japan intervened on Monday morning, but not to support the yen.
Instead, it offered to buy an unlimited amount of 10-year JGBs, or Japanese government bonds, at a yield or interest rate of +0.25%.

In effect, the BOJ was saying we are keeping interest rates low at a time when other central banks are raising rates.

It’s a central tenet of FX markets that money flows into the currency that offers the highest return, and as this chart shows that isn’t the Japanese yen.

 

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