The Japanese Yen has entered a free-fall in the fourth-quarter of 2012 and has not looked back since. The Japanese elections ushered in the return of the LDP under the leadership of former Prime Minister Abe and the return of economic policies known to market participants as ‘Abenomics’.
‘Abenomics’ haven not worked in the past, do not work now and will not work in the future which will further harm the Japanese economy which has been in a recession for the better part of two decades and flirts with a depression twice a decade. The Japanese Yen, usually used as a carry trade, has collapsed and Abe wants to see further weakness in his currency in desperate hope to bolster exports.
Japan depends heavily on their export industry of quality electronics, machinery and cars. The weaker the Japanese Yen the more attractive their exports become. Abe hopes that the global economy will stutter along and tries to make Japanese goods as cheap as possible to foreign buyers without sacrificing the bottom line.
His primary tool to achieve that goal is to make sure the Japanese Yen as weak as possible against major trading partners which is why he threatened the markets with unlimited supply of Jen in the open market which caused the current collapse of the currency. The Japanese Yen has been dropping with an accelerated pace as nobody wants to bet against the Japanese Prime Minister and his threat to destabilize the currency. This threat carries extra weight as Abe is not able to destroy the Japanese economy due to its dead status which makes the Yen the next best thing to ruin.
Most analysts from both side of the spectrum predict that the USDJPY, the most popular Yen pair, will close 2013 between 89.5 and 93.5. Roughly 90% of market participants believe in that prediction which makes us one of the remaining 10% as we believe the Japanese Yen will finish 2013 lower as compared to the U.S. Dollar, Euro, Australian Dollar, British Pound and Canadian Dollar as well as New Zealand Dollar.
We believe that the USDJPY will close 2013 in a range between 75.60 and 79.60. Prime Minister Abe threatened global markets with an unlimited supply of Yen, but the ultimate question will boil down to how weak the U.S. Dollar will be. The U.S., also referred to as the ugly step sister of Japan, also has a weak USD policy and this pair may be caught in crossfire of who can print more money faster and devalue their currency.
The U.S. still has an unresolved fiscal cliff issue plus the debt ceiling debate has not even been taken into consideration. In essence the U.S. is close to default on its debt a la Greece and we all know what that did and still do to the Greeks. Hopes are high that the U.S. will manage to cheat its way out of it for now with the help of Goldman Sachs and some fancy balance sheet engineering, but eventually the truth will come out. Goldman Sachs helped Greece hide their problems so Brussels could not detect them and we know how that story unfolded.
Once the global economic problems unfold people will try to hide in safe havens and the Japanese Yen will strengthen relevant to its major partners whether Abe likes it or not. His 2% inflation target is not only twice the target of the Bank of Japan, but nothing more than some terrible Sushi.