Japan will become the land of the falling yen

RATHER worryingly for Japanese exporters and the policymakers trying to prop them up during the recession, the yen has staged two attempts in as many days at breaking below the &yen;89 level. <br /><br />Yesterday it fell as low as &yen;88.74, close to the Japanese currency&rsquo;s all-time low of &yen;87.11 against the dollar, which it hit in mid-December last year. So are we heading into uncharted waters for the yen, and should foreign exchange traders be chasing the currency pair lower?<br /><br />Traders certainly still have a healthy appetite for the yen, according to the latest research from Bank of America-Merrill Lynch. International Monetary Market (IMM) accounts remain significantly long on the yen, its strategists say. <br /><br />&ldquo;Notably, TFE-based margin traders have completely unwound their long dollar-yen positions over the last week and are now net short the pair for the first time since mid-August. The combination of both IMM and TFE accounts long of yen raises the risk of a short squeeze higher in dollar-yen,&rdquo; reads a research note.&nbsp; <br /><br /><strong>BROAD-BASED DECLINE</strong><br />The broad-based decline in the dollar shows no signs as yet of abating, much to the detriment of Japanese prospects for growth as exporters feel the pain of a strong yen. But will the dollar&rsquo;s decline be sufficient to push the yen to even stronger levels against the dollar?<br /><br />Although speculators are backing the yen, those who invest in Japan are increasingly worried about its public finances&nbsp; &ndash; the IMF forecasts public debt at 227 per cent of GDP in 2010. Outflows of fixed income capital accelerated in the wake of the general election at the end of August. Although there was a degree of stability between mid-September and mid-October, outflows began to re-emerge following reports that Japanese ministries and agencies had asked for a record budget for the 2009/2010 next fiscal year, says Neil Mellor at Bank of New York Mellon.<br /><br />He does not recommend chasing the yen higher at the current levels. &ldquo;With Japanese markets haemorrhaging the support of foreign portfolio capital, the yen is arguably being deprived of a broad base of support, which may be all that is needed to deny it an assault upon its October highs,&rdquo; he notes.<br /><br />Currency traders ought to feel rather nervous as the yen enters new territory &ndash; it may not stay there.