Yen set to fall

Yen weakens regardless of whether the coronavirus outbreak worsens or not. Although yesterday the JPY was operating in its normal function as a safe haven and showed strength through the day, the Yen’s safe-haven days may be coming to an end. The reasons are as follows:

  • As global interest rates fall towards zero and beyond, the focus on the growth potential of countries is more of a driver than interest rates.
  • A technical recession for Japan looks almost certain and there has been a recent run of poor Japanese data. In November, Japan’s business cycle leading indicator hit 2009 levels, initial 4QGDP estimates came in at -6.3% q/q as private consumption dropped the most since 2014.
  • Corporate bankruptcies increased by 16.1% y/y in January this year, the adjusted merchandise trade balance has been negative for 11 months and machine tool orders have fallen by at least 27% y/y in each of the last 12 months.
  • Yen outflows have been accelerating with the largest purchase of foreign debt since September 2018 by Japanese pension funds.
  • Japan’s key auto industry is hit by supply chain issues from coronavirus impact. Furthermore, 30% of Japan’s exports go to China and South Korea, the two worst-affected areas.
  • The coming Tokyo Olympics in July may be badly impacted by the coronavirus outbreak and keep many foreign supporters away.

So, in conclusion, the argument for a weakening Yen is that if the coronavirus impact worsens, then gold, silver and US Treasuries will be better safe havens than the Yen. If the coronavirus impacts recede then the growth story will come back into focus and the Yen will weaken again as Japanese growth is weak. So, watch for this dynamic to play out, and don’t just assume that the JPY will carry on strengthening.