The yen is off about 1% this month to bring the year-to-date
decline to about 2.4%. It fell by 12.2% in 2022 and 10.3% in 2021. The yen
rallied against the dollar for the five preceding years. Over that five-year
period the dollar fell from around JPY124 to JPY99, but it was all done in H1
16, and after a rally at the end of 2016 and very early 2017 (to about
JPY118.65), the dollar ground down around JPY101.
This year’s dollar low was set in mid-Jan near JPY127.25 and
the high was set in early March near JPY138, amid talk of higher for longer by
the Fed and before the bank stress. The drop in US rates as the market
responded to the stress, drove the greenback to about JPY129.65 in late March. It
reached a high last week near JPY135.15.
Within ranges the exchange rate does trend. A simple five-
and 20-day moving average cross over system is a reasonably good trend
identifier. It has caught the big moves in both directions over since last
spring with a minimum of false signals. Most recently, the five-day moved above
the 20-day on April 11, when the dollar settled slightly below JPY133.10.
There are two important
events this week. First is Tokyo’s April CPI. It does a very good job of
leading the national figures, which are not due for a few weeks. Headline and
core inflation (which includes energy) has fallen sharply, largely as a
function of the govt subsidies. However, the measure that excludes fresh food
and energy is making new cyclical highs. That brings us to the second important
event, the BOJ meeting conclusion. Both events are on Friday local time. The
first inkling into the new leadership’s thinking will be in the updated
inflation and growth forecasts. A majority of economists surveyed see a pivot
coming in June/July.
Japan’s Ministry of Finance report weekly portfolio flows
(stocks and bonds). The main features recently are that after selling foreign bonds for the previous two weeks (~JPY1.3
trillion) and returned to the buy side (JPY500 bln). In the first 15 weeks of
this year, Japanese investors bought JPY10 trillion foreign bonds. In the same
period last year, they sold JPY4.7 trillion foreign bonds. Foreign investors
have become very bullish Japanese stocks. They bought a large amount of
Japanese equities for the second consecutive week. In fact, its purchases over
the past two weeks were a record JPY4.13 trillion.
Warren Buffet has also broadcast that he was “weighing more
Japanese investments” and some reports suggest he may issue a yen bond to raise
the currency rather than buy it in the fx market.
In my work, over the past 6-9 months or so, I
have approached it a bit differently. At current levels, the yen is about 41%
under-valued on the OECD’s model of purchasing power parity. Typically, the
OECD currencies are not more than +/-20% from fair value. This is not the only
model of valuation out there of course, but it has advantages of being
intuitively clear, a concept that many are familiar with (Economist magazine
does it with Big Macs and Starbucks Cappuccino. And it gets to the value
proposition. The yen is cheap for US based investors. This means revenues,
wages, and, of course, companies themselves. It may take a few years, within a
reasonable investment horizon, for the currency overshoot to correct, but it is
not unreasonable to think it has begun. Imagine capturing even half of that
over-valuation.
The median forecast in Bloomberg’s survey sees the
dollar at JPY129 at the end of June, JPY127 at the end of September, and
JPY124.50 at the end of the year.
A month ago, the median
was for JPY130 at the end of June slightly higher, but then the market has
turned more dollar negative and that aligns with expectations for a Fed rate
cut. The end of September forecast a month ago was JPY128 and the year-end
forecast was JPY126.00.
Speculators in the futures market has been treading water in
recent weeks, with the next short position hovering around 54-57k contracts for
the past four weeks. They have not been net long yen since March 2021. Since
the end of Q1 21, the average net short speculative position has been about
65.2k contracts.Disclaimer