A Look At The Weakening Yen

Towards the end of October and beginning of November last year the Japanese yen broke out of its downward trend. Since then the USD/JPY has traded from approx. 79.00 up to the recent high of 88.39 hit on the 4th of January, a stunning 11%+ move in less than 3 months. Why this sudden weakening of the yen? Well it’s basically what the new Japanese Government is targeting and it seems the market is more than willing to give it to them.

In late September 2012 the Liberal Democratic Party took office lead by a Mr. Shinzo Abe. From the outset of their electoral campaign they have made it clear that they’ll be seeking policies to tackle the grip that deflation has on the country. They plan on doing this by weakening the yen through Quantitive Easing; basically printing more yen and buying bonds in the market to increase the cash flow in the economy.

An increase in cash within an economy should cause inflation by causing the price of goods and services to increase. This should also have a positive effect for their exports; the cheaper yen will make their goods more competitive in the global markets so all going well a win win for the LDP.

This could be the beginning of a new era for the yen, and the Japanese economy in general. After 2 decades of deflation how will the economy react to this weaker yen? Will QE have the desired effect? The LDP hope so; if they continue on a course of unlimited QE then eventually, over time, inflation should materialize. In any case it’s an interesting one to watch…

The USD/JPY is trading at 87.40 at the time of writing, down over 1% from its highs made on the 4th but a pullback is only to be expected considering its 11%+ move since October. Support is seen at 87.10, 86.70 & 86.50.

DISCLOSURE AND DISCLAIMER: The Above Is For Informational Purposes Only And Not To Be Construed As Specific Trading Advice. Responsibility For Trade Decisions Is Solely With The Reader.

By Ross Doran