- Structural changes are supporting yen weakness:
- Lower Savings rate means internal debt cannot be financed locally over time
- Trade deficit means yen selling at the margin, structurally
- Weak economic growth needs further large monetary and fiscal support
- Structural weakness reduces yen as safe haven and increases its use as a funding currency
- Treasury and BoJ aligned with focus on weaker yen and creating inflation
- Buy US$ or AUD or NZD against Yen - expect multi-year rally, first target 90 US$-JPY
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There have been strucural reasons for a weaker yen for some time:
The Japanese economy has been in dire straights for nearly a decade, with slow GDP growth, bigger debt issues than either Europe or the USA and very slow-reacting policy responses as well as chronic deflation. These factors have combined into Japan's Lost Decade and a half.
What has to date strucurally kept the yen from depreciating substantially has been the fact that government debt (which is around 200% of GDP) has been readily financed by Japanese investors.No external funds were needed. This was enabled by a very high savings rate due to a frugal population. Additionally Japan's trade surplus has for years aided the yen as it assured international demand for the currency.
Both these factors are diminishing rapidly and are in fact being reversed. The savings rate has over the last years fallen to as low as 0.5% and is currently holding just above 2% and is in line with the infamous spender: the USA. High savings rates existed due to an aging population that is used to saving, but with the bulk of this generation now reaching the end to their life cycle, gradually the 'saving generation' is being replaced by a new and not so frugal generation. The high savings rates of the past are unlikely to be repeated and even if they should be, it is unlikely that they will be recycled into financing Japan's government debt quite so readily.
Trade surpluses have turned into deficits assuring that not only the international demand for the yen is eliminated but that in fact net selling of the yen occurs strucurally on the margin. Japan has simply become too uncompeititve and her economy cannot function with these high levels of the yen.
Although the above structural changes have been in place for a while it was another development that has supported the yen in recent years and did not allow these slow moving structural changes to be reflected in the yen's valuation: This support came in the form of the financial crisis and the flight to quality that came with it. The yen rapidly became a safe haven currency for the region and each flight to quality has caused regional investors to flee to the 'safer' yen and her population to repatriate back home. This becomes obvious when correlating any crisis development of the past few years to the yen's movements or when looking at the net money inflows into Japan's money market funds over the last few years.
At last even this final trend is being reversed and replaced by catalysts which allow and even mandate a weaker yen: The Japanese population has finally had enough and is going to elect a new government (December 16th) whose main platform for running is a weaker yen as well as an end to deflation (with inflation targets as high as 3%). This new government will also appoint the next helm of the central bank as well as its deputies in April 2013. This means that they have all possible means of achieving their aims at their disposal and finally the Treasury and the Bank of Japan will be aligned in its mission to weaken the yen and create inflation.
This catalyst together with the above structural support should help the yen weaken for years into the future and one can reasonably expect 90 or higher for the yen-US$ rate within the next year.
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