Fundamental Forecast for Japanese Yen: Bullish

- What happens to the Japanese Yen when threat of intervention is removed?
- Yen tumbles as S&P 500 continues to set fresh highs
- ‘September effect’ not having much of an effect on Japanese Yen

The Japanese Yen finished the week lower against all but the British Pound and the US Dollar, as impressive rallies in the US S&P 500 and broader financial market risk sentiment pushed the safe-haven currency sharply lower against major counterparts. A mediocre week of economic data hardly helped matters, and hawkish rhetoric from the Ministry of Finance pushed the Yen even lower. Vice Finance Minister Yasutake Tango stated that the administration was watching currency moves closely—implying that forex market intervention was a distinct possibility. Indeed, the Japanese Ministry of Finance has historically been an active participant in the Japanese Yen exchange rate and has repeatedly intervened in instances of excessive Yen strength. The very fact that the US Dollar/Japanese Yen exchange rate reached the psychologically significant 90 mark was enough reason to fear MoF intervention, and Tango’s comments were enough to fuel a rapid USDJPY pullback. Later commentary from newly-appointed Finance Minister Hirohisa Fujii quickly dispelled the short-term threat to JPY stability, but the damage had been done and the Japanese Yen remained on offer through the week’s close.

The legitimate threat of MoF FX intervention served as a clear warning to JPY bulls, but recent rhetoric suggests that there will be little in the way of further Yen strength. This leaves the currency to trade purely off of financial market risk sentiment. The fact that the S&P 500 recently registered fresh 2009 highs hardly bodes well for the risk-linked currency, but no market can rally indefinitely. Given the overwhelmingly bearish trend in the USDJPY (bullish trend for the JPY), it seems momentum is plainly in the Yen’s favor. Yet it remains critical to watch any and all moves in key financial market risk barometers.

We previously claimed that the “September Effect” could lead the S&P 500 lower and the Japanese Yen higher. Recent weeks have produced impressive equity market strength yet the JPY has remained relatively stable. We believe that the Yen stands to gain on any subsequent pullbacks in stocks, and recent experience shows that it can hold its own despite major S&P strength. Thus we would argue that risks remain fairly bullish for the Yen. If stocks continue their seemingly interminable rally, the JPY could pull back slightly. If stocks fall, the Yen will in all likelihood continue its previous ascent. Things are never quite this simple in currency markets, but we believe JPY risks favor near-term rallies.

The wild card will come on Wednesday’s Trade Balance report. The export-dependent Japanese economy has taken a massive hit on the sharp drop in foreign demand for its own production. Any signs of continued exporter duress will once again raise political pressure on the Ministry of Finance to counteract Japanese Yen strength. Though we clearly believe that risks of intervention are remote, a truly shocking trade balance result could rekindle market speculation on MoF intervention.

The coming week may prove significant in determining more medium-term direction in the Yen. If nothing else, markets will definitely watch for signs that the USDJPY may finally break below the psychologically significant 90 mark.

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