This past year, the yen was one of the few financial instruments to benefit when the carry trade unwound and caused money to flow away from high-yielding currencies and back into low-yielding currencies like the yen.
Investors became risk averse with their money. They poured it into things that had been beaten down for years because it seemed to be a safe place to run to.
However, in December I started talking to you about a possible turn coming in the yen and that the yen party was about to come to an end soon. Then on Jan. 5, I wrote an article that mentioned reasons to buy the USD/JPY pair.
Since then, things in Japan have continued to unravel. They’ve had a 12 percent slide off in their GDP. The yen has risen 23 percent against the dollar, which is killing their exporters. Toyota, Sony, and Honda are all laying off employees. In fact, Honda has even mentioned that if the yen stays at 100 to the dollar or under, that they may be forced to move some of their operations out of Japan.
If that were not enough, when Japanese Finance Minister Shoichi Nakagawa showed up at the latest G7 meeting in Rome, he was accused of being drunk and unable to properly participate due to his inability to understand the questions being posed to him.
Nakagawa resigned a few days later, adding his name to the list of finance ministers that Japan has gone through in just a short time. Governmental instability is never good for a currency, and it's another reason why the party may be ending for the yen, especially against the U.S. dollar.
Now there’s a new reason to close out any long positions in the yen and to reverse course by shorting it. Thirteen Asian nations announced on the Feb. 22 that they were forming a $120 billion currency pool in order to defend their currencies.
This is a powerful alliance and should trigger a building wave of confidence across these Asian countries as they see governments teaming up and banding together for the support of their own currencies.
Japan, China, and South Korea will provide about 80 percent of the funds for the pool and the other 10 countries will fund the balance.
While many of these currencies have weakened significantly and funds may have to be used to buy their currencies, the Japanese could always use any extra resources to sell their strong currency.
With these countries banding together in such a strong, united way, it shows that the story may be about to change. In 2008, most of these currencies across Asia have weakened in while the yen has strengthened. You are going to see this tide turn.
I also think this massive currency pool could help to prevent another Asian contagion like what happened in 1997 through 1998, when many of Asian countries used most all of their foreign reserves trying to defend their currencies and had to finally turn to the IMF for help.
It was a horrid problem that ended up causing a ripple effect around the world. So they are being very preemptive this time around in trying to stop something like this before it gets that far.
Therefore, I think the sentiment is going to shift away from a strong yen while other currencies finally start to strengthen. You will likely see the yen weaken across the board, but I’m most confident in the prospects for the USD/JPY exchange rate going up overall throughout the remainder of the year due to this new vote of confidence and also due to all of the problems plaguing Japan.
At the end of the year, I think you will find that the USD/JPY is back up over 100 and headed higher. This will help Japan’s economy, especially exporters who are household names here in America.
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