yen lurched downwards 2.4 per cent versus the dollar and 2.8 per cent against the euro yesterday as the Bank of Japan (BoJ) waded into the forex markets to weaken the currency. While many institutional investors are not permitted to bet directly on forex, a wide range of currency-tracking products enable them to benefit from these movements through exchange-traded notes (ETN).
ETF Securities (ETFS) says it has seen money moving steadily into short yen positions over the last two weeks. ETFS’s Martin Arnold says that this position now represents 18 per cent of all assets under management in the firm’s currency products – slightly down from 24 per cent a week ago.
But this does not necessarily reflect confidence in the effectiveness of the BoJ’s actions: the yen is slated to weaken over the medium-term without intervention. In response to the announcement yesterday, Capital Economics released a note: “Barring a major new shock in global markets, we continue to expect the yen to fall back to around 90 against the dollar by year-end, regardless of intervention.”
So the policy change could just speed things up. Japanese fundamentals have been poor for a long time, with sluggish growth, deflation and an estimated government gross debt of 228 per cent of GDP?plaguing its economy. The yen’s surge to 15-year highs against the dollar was therefore little more than the result of the markets’ ongoing quest to find somewhere safe to store cash: as a stable advanced economy, Japan was merely seen as the best of a very bad set of options.
But analysts have been anticipating an end to these highs for some time. The BoJ has been putting off intervention in part due to a G7 agreement to forego direct intervention in the currency markets. US officials are likely to look unkindly on the policy change, which rather undermines the case against voracious Chinese purchases of Treasuries.
But even if the US goes for further quantitative easing, most economists expect the balance to tip back in favour of dollar strength. Which means that – unless the global economy double dips – the BoJ and short yen traders may get their wish without having to pour money into a bottomless pit.