The End of the Lost Decade and the Evolving USD:JPY Relationship

In a recent Wall Street Journal article by Alex Frangos, ““Top Banks Missed Call Y100 Level Soon,” it was reported that not a single analyst from 15 Wall Street firms expected the Japanese Yen to break the 100 barrier for the USD: JPY. About this, Frangos wrote that, “Who among Wall Street’s brightest currency minds predicted four months ago that the yen would get to 100 per dollar so soon? Nobody, that’s who. None of the currency analyst teams among the top 15 currency-trading banks surveyed by Dow Jones Newswires at the end of last year penciled in ¥100 to the dollar by the second quarter.”

For the USD/JPY trade, elected officials and central bankers are directing the movement of the USD:JPY relationship. Campaigning for office last fall, Prime Minister Shinzo Abe of Japan had a platform of aggressively moving to stimulate the economy of the island nations so that it would finally pull out of its “Lost Decade” after more than 22 years of stagnant growth.

The Bank of Japan has complied with massive quantitative easing efforts. These moved into high gear after the election of Abe. As the chart below shows, these moves by Prime Minister Abe and the Bank of Japan have altered the USD:JPY relationship in a way that the analyst community did not expect.

More of this should be expected for those looking to at future trades based on the USD/JPY relationship. The Bank of Japan’s efforts are more than just a program to lower interest rates so that businesses can borrow cheap to expand and homeowners can get low interest rate mortgages to buy homes. It is also part of an effort to advantage Japanese exporters with a cheap currency that allows for discounts in goods priced in Yen.

The Federal Reserve appears to be pulling back on its quantitative easing efforts, which should strengthen the dollar. US Dollar assets will be paying higher interest rates, which will attract more investors. In addition, it is a sign that the American economy is improving. From that, The Greenback will rise in value.

The Bank of Japan will have to keep up is quantitative easing efforts. Between that and the Federal Reserve reigning in Quantitative Easing III, which is a bullish sign for the American economy, the USD: JPY relationship should be one that features the Yen in a weakened state due to the efforts of Prime Minister Abe and the Bank of Japan to strengthen the economy.