The Enigmatic Yen – It Is More Than An Equity Story

Last year was the fourth consecutive year that the yen fell against the dollar. However, what is obscured by this factoid is that over the pastsix months, the yen has been the strongest of the major currencies, rising almost 3.2% against the US dollar.  

While some may be tempted to attribute the yen’s strength to the dismal start of the year for equities, the fact of the matter is that the yen’s strength began before this week. Recall that 48 hours after the Fed hiked rates last month, the BOJ announced some largely operational adjustments to its asset purchase program. The explicit goal was to sustain the asset purchases, and this included extended the duration of government bonds being bought. 

The BOJ announced that it would buy more equities (ETFs) as well. This prompted a brief reaction that was unwound when it was realized that the new shares being bought was to offset the shares the BOJ would sell as it facilitated the unwinding of bank cross shareholding. 

The dollar initially rally to near the multi-year highs set in mid-November near JPY123.75, but quickly reversed and fell to nearly JPY121. The greenback has trended lower since. On Christmas Eve, the dollar was sold through the uptrend line connecting the spike lows in August (~JPY116.20) and mid-October (~JPY118).It has been unable to resurface above that trend line.It is now found near the 20-day moving average (~JPY120.85).  

Although in the past, extending maturities of bonds being purchased by a central bank was considered easing, this time is seen differently. It was seen as a sign of the BOJ reluctance to step up it efforts.The IMF, among others, has warned that the BOJ’s QQE is not sustainable at the current pace. The IMF examined the capital requirements of Japanese banks, insurers and pension funds and concluded the BOJ would have to start tapering in 2017 or 2018.Some media reports cite others thinking the current program would have to be adjusted by the end of this year.