Is the Yen a One Way Bet?

‘Tapering’ wasn’t a term in popular use in the financial lexicon till Bernanke stated in testimony before Congress that Fed may reduce the size of quantitative easing. Since then, speculation of tapering has exploded. Making traders wonder where to place their bets. The very day after Bernanke’s statement saw the Yen reaching a high of 103.74 to the U.S. Dollar. Does this mean we must place our bets on Yen continuing to weaken? 

Calls for a Sharper Third Arrow

Japanese Prime Minister, Shinzo Abe, continues to drive forward his three arrows, with monetary loosening remaining high on the agenda. However, according to Business Week, his third arrow needs sharpening. The first arrow pressured the Bank of Japan to launch unprecedented aggressive monetary easing and setting a target of 2% inflation to support a target of 2% real GDP growth. The second arrow is a blowout deficit-financed supplemental government that incorporate new public works spending. Finally, the third is a program of reforms to achieve growth through stimulating private investment. It targets structural reforms to ease restrictions on health care, labour, tourism and agriculture.

The Dollar vs. Yen

According to Hantec Markets’ Richard Perry,

“After around 6 months of consolidation, the Yen has begun to weaken once more, with Dollar/Yen clear of the psychological 100 Yen level. Abe seems intent on remaining full steam ahead with the Bank of Japan’s massive bond buying program. Coming at a time when the Federal Reserve is supposedly ready to start winding down its own asset purchase programme, the downward pressure should remain firmly on the Yen. The May high of 103.74 is coming under increasing threat. A clean break would leave the Yen open for significant weakness with little to hold the Dollar back until 110.67.”

According to Bloomberg, the Dollar remained higher against the Yen before three Federal Reserve presidents spoke on the growing speculation around US central bank and its plan to begin trimming the monthly bond-buying. This Dollar high is the highest against the Yen in six months. It resulted from an unexpected drop in U.S. jobless claims and a rise in leading economic indicators. This comes amongst speculation of the U.S. central bank considering a reduction in monetary stimulus as early as the following week, at time of print.

The favoured bet

It seems the favoured bet by the futures traders are for the further decline of the Yen against the Dollar. It has been put forward that the Dollar is benefitting from a very small risk of taper in December. The Yen touched 103.38 to the US Dollar on 3^rd December, the highest since May. The euro has also strengthened against the Yen. They have reached a four-year high, German lawmakers reached a coalition accord on wages and spending increase without raising taxes. Thanks to this approach demand for the assets of Europe’s largest economy has spurred.

A Loss to Abenomics

While the first two arrows have helped weaken the Yen, they have also improved corporate earnings. It seems to truly fulfil the three-pronged plan to revive the world’s third-largest economy; Abe needs to get the support of business leaders such as Japan’s third richest man, Hiroshi Mikitani.  He is the chairman of Rakuten, Japan’s biggest e-commerce company, which is a leading investor in Pinterest and owner of the Kobo e-reader. He is also a man who has lost faith in Abenomics.

The loss of Mikitani as an ally is a great blow. However, it hasn’t sealed the fate for the Yen. Given the challenges to come, Abe will need to maintain the support from business leaders such as Mikitani. The third arrow was always going to be the trickiest.