Yen Returns To Downtrend, Nikkei Struggles To Stay Afloat

The stock markets in Japan were closed yesterday due holidays. But today as they re-opened, the Nikkei started falling rapidly due to the fact that investors are taking into account the disappointing Non-Farm Payrolls report out of the U.S., and the widening yield differential between Japanese treasury bonds and U.S. treasury bonds.

The MSCI index of Asian stocks fell 0.6% after the NFP report supported the idea that the Fed may have to keep its interest rates low for a prolonged period of time. The Nikkei index fell 3.1% at the beginning of the Asian session, but it later went back to its opening levels to stay consolidated around the 15535 zone.

The situation in Japan is complex, as the differentiation in the yields between Japanese sovereign bonds and the rest of the developed economies could keep investors away from the Japanese financial markets. For instance, the 10 year U.S. treasury bonds have a current yield of approximately 2.837% while the Japanese 10 year treasury bonds have a yield of 0.650%; obviously a huge difference between the two.

We can clearly see why the USD/JPY has been the best performing currency pair for the past year. But, this is good for Japan, due to the fact that when the yen rises, this hurts exporter’s earnings obtained in dollars at the time they repatriate their gains back to Japan. The dollar will most likely return to its uptrend versus the yen, because most probably the Fed will stay committed to cutting down on its asset purchasing program, while the Bank of Japan keeps its economic stimulus intact and even hinting at more stimulus if needed.

In the United States, the financial markets closed to the downside, mostly because investors are trying to square off their positions before the earnings reporting season for American companies. This week the American banking giants take their turn in reporting their quarterly earnings, like the banks of; Citigroup, Bank of America, J.P. Morgan, and Goldman Sachs.

As a last note, we must keep in mind that during this earnings reporting season, 10 out of 11 forecasts for the companies in the S&P 500 have been revised to the downside. This is probably why investors are awaiting this week’s reports with a bit of skepticism.