Yen most polarized currency since 2008

The yen continues to be the world’s most polarized currency over the last six years. In 2013 and 2012, the yen was the worst performer among the 11 top-traded currencies. 

2011 and 2010 were a mirror image as the yen outperformed all major 10 currencies in both years.

2009 saw the yen lose against every currency, and 2008 was again the opposite.

No other currency has staged such extremes as the yen.

After commodity currencies dominated the universe in 2007 thanks to the BRICS/commodities boom, financed largely by yen-carry trades in FX markets, the deleveraging of the 2008 crisis triggered massive repatriation into the yen as those trades came crashing down.

In fact, the yen was the only major currency to have rallied appreciated against gold in 2008.

In 2009, the Federal Reserve and Bank of England ventured into quantitative easing, giving the “all-aboard” signal to equity traders, while currency maximized their carry by selling yen and buying every other currency and commodity.  It was the yen’s worst currency in four years.

2010 and 2011 lifted the yen back to the top, as the Eurozone debt crisis triggered the undoing of yen-backed carry trades, particularly prompting losses in European and repatriation from “risk currencies” into the yen.

2012 Was the year Japan announced its biggest step towards fighting deflation, via a doubling of its asset purchasing and escalating government spending. Japanese equities had their first annual gain in three years and the yen tumbled as Japanese and foreign investors fled their currency to chase higher yield.

2013 proved the mirror image for the yen, as it is the only currency to have fallen against gold, -14%. In 2008, the yen was the only gainer vs gold, at +14%.

The Bank of Japan changed the definition of price stability to cement a goal of 2.0%, as well as announced the doubling of its monetary to ¥270 trn within two years via a monthly expansion of its balance sheet to over 1.0% of GDP – compared to 0.5% of GDP by the Fed.

The BoJ also went as far as removing the Bank note policy, which required that total asset purchases by the central bank should not exceed total bank notes in circulation

JPY weakness intensified mainly on accelerating risk appetite in global equities and not due to any news policy measures from the Bank of Japan. The 1.1% y/y CPI attained in October was the highest since November 2008.

Inflation has remained above its three-month average since the last six months. A vital requirement to keep it going is wage growth. Japanese companies (services and manufacturers) show mixed signals over compensation.

Increased bonuses have been prevalent over the last 6 months following the 150% jump in Japanese equities. But translating compensation into persistent wage growth has yet to be seen.

Worries with job security and cultural considerations continue to act as a detriment.  Worker’s real household income fell to -1.3% y/y in October, the lowest in more than two years.

In order for yen weakness to be sustained via rising inflation, wages must continue to increase. A combination 107 remains a realistic target for now.