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120 Billion Reasons to Sell the Yen

Written by: Sean Hyman

Article Overview: Last year, one of the few financial instruments that was headed to the moon was the Japanese Yen. Since then, things in Japan have started to unravel. GDP has declined and exporters are suffering. Shorting the Yen vs the US dollar will prove to be profitable during 2009.

120 Billion Reasons to Sell the Yen

This past year, one of the few financial instruments in the world was headed to the moon. Which one was that? The yen!

Yeah, the carry trade unwound which caused money to flow away from high yielding currencies and back into low yielding currencies like the yen.

Investors became risk adverse with their money. They poured it into things that had been beaten down for years because it seemed to be a safe place to run to. Thus the yen was a huge beneficiary during this ultimate “fear factor”.

However, recently I started talking to you about a possible turn coming in the yen and that the yen party was about to come to an end soon.

Things go from “Bad to Worse” in Japan

Since then, things in Japan have continued to unravel. They’ve had a 12 percent slide off in their GDP. The yen has risen 23 percent against the dollar which is killing their exporters. Toyota, Sony and Honda are all either doing layoffs or are about to do layoffs. In fact, Honda has even mentioned that if the yen stays at 100 to the dollar or under, that they may be forced to move some of their operations out of Japan. So this is serious stuff!

If that we’re enough, when the Japanese Finance Minister showed up at the latest G-7 meeting in Rome, he was accused of being drunk and unable to properly participate due to his inability to understand the questions being posed to him.

This caused him to have to step down from power just days later. This makes several finance ministers that Japan has gone through in just a short time. Governmental instability is never good for a currency. So these were all of the reasons lately that have surfaced as to why the party may be ending for the yen (in particularly against the U.S. dollar).

120 Billion Reasons to Sell Short the Yen and Stop Shorting Other Asian Currencies!

But now there’s a new reason to close out any long positions in the yen and to reverse course by shorting it. Why? 13 Asian nations announced on the 22nd of this month that they were forming a $120 billion currency pool in order to defend their currencies.

This is a powerful alliance as these countries team up together. This should send a building wave of confidence across these Asian countries as they see governments teaming up and banding together for the support of their own currencies.

Japan, China and South Korea will provide about 80 percent of the funds for the pool and the other 10 countries will fund the remainder.

While many of these currencies have weakened significantly and funds may have to be used to buy their currencies, the Japanese could always use any extra resources to sell their strong currency.
With these countries banding together in such a strong, united way…it shows that the story may be about to change. Formerly in 2008 and up until now, you’ve had most of these currencies across Asia weakening unduly and the yen having an unreasonably high strength.

I think you are going to see this tide turn. These things happen like ships turning and not like speed boats. However, I think the yen is starting its turn even now and it won’t be long before these other Asian currencies start to strengthen once again.

I also think this massive currency pool could help to prevent another Asian contagion like happened in 1997-1998 as many of the Asian countries used of most all of their foreign reserves trying to defend their currencies and had to finally turn to the IMF for help.

It was a horrid problem that ended up causing a ripple effect all around the world. So they are being very preemptive this time around in trying to stop something like this before it gets that far.

USD/JPY “Prepares for Takeoff” on Yen Weakness!

Therefore, I think the sentiment is going to shift away from a strong yen while other currencies finally start to strengthen. You will likely see the yen weaken across the board but I’m most confident in the prospects for the USD/JPY exchange rate going up overall throughout the remainder of the year due to this new vote of confidence and also due to all of the previous problems plaguing Japan.

At the end of the year, I think you will find that the USD/JPY is back up over 100 and headed higher. This will help Japan’s economy, especially its exporters that are such household names here in America.

So get ready for more yen weakness and dollar strength against it. Also, it won’t be long before other Asian currencies start to strengthen as the yen starts to weaken.


Sean Hyman
Head Course Instructor

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Article Tags: asian currencies, asian nations, beneficiary, currency, fear factor, finance minister, finance ministers, financial instruments, gdp, honda, japanese finance, layoffs, new reason, rome, safe place, serious stuff, short time, unwound, year one, yen



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