Shorting the yen: The trade of the decade is looking better & better

The recent strength in the Japanese yen versus the US dollar and the euro, coupled with the deteriorating global economic outlook, has increased the likelihood that the Bank of Japan (BoJ) will carry out more money printing. This adds to the case for going short the Japanese currency.

Yen strength

Since the middle of March this year, the Japanese yen has rallied more than 7% against the US dollar, and in doing so it has reversed most of the decline that began at the beginning of February.

The yen has also strengthened against the euro and is currently near an 11-year high versus the single currency.

Deteriorating global outlook

In addition to a strong yen, Japanese exports are also being impacted by the deteriorating global economic outlook.

Yesterday the International Monetary Fund (IMF) said that China’s slowing economy faces significant downside risks and that it relies too much on investment. The IMF urged the nation’s leaders to boost consumption and channel its people’s savings away from housing.

The debt crisis in the Eurozone is also far from resolved. Within hours of the €100 billion Spanish bank rescue receiving approval from Germany’s parliament, the euro fell to its lowest level in more than two years, and Spain’s 10-year bond yield quickly spiked above 7.5%.

In Greece, officials from the EU, ECB and IMF are meeting in Athens to assess the progress the nation has made in meeting the terms of its bailout. However reports suggest that Greece has little or no chance of meeting its debt reduction obligations.

The turmoil has now spread to the regions core with Moody’s putting the AAA credit ratings of Germany, the Netherlands and Luxembourg on negative watch. The move means that three of the Eurozone’s most stable economies could see their credit ratings downgraded within 18 months.

Further evidence of a global slowdown was seen in the UK as official figures showed GDP contracting by 0.7% in the second quarter of 2012.

BoJ won’t hold back on easing

The combination of a strengthening yen, weakening global growth and a stock market that has fallen more than 18% since 27 March, has increased the likelihood that the BoJ will carry out more money printing.

Speaking earlier today, Deputy Governor of the BoJ, Hirohide Yamaguchi, said “When the outlook turns out to be weaker than expected or the risk associated with it intensifies, the bank will not hesitate to implement additional monetary easing.”

Mr Yamaguchi is by no means alone in his opinion that Japanese officials won’t hold back on easing. Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former central bank official, said, “Given the deepening global slowdown, the BOJ will remain in easing mode… We can’t rule out the chance that the BOJ will expand easing measures next month, depending on the level of the yen and discussions with new board members.”

The latest forecasts indicate that inflation in Japan will stay below the BoJ’s 1% target for the next two years, and it’s becoming increasingly clear that the central bank is prepared to try new ways to try to end more than a decade of deflation.

Takahide Kiuchi, a former Nomura Securities economist who was appointed to the BoJ policy board yesterday told reporters in Tokyo that, after almost two years “of monetary easing centered on asset purchases, the time is coming to examine the impacts of the policies”. Mr Kiuchi continued, “If we conclude that the chance of achieving our target isn’t so high by extending the current policies, I think we of course need to consider new forms of monetary easing in a flexible manner.”

In my opinion the BoJ has no choice but to engage in massive money printing for an extended period, something which is likely to dramatically reduce the value of the yen.

A weekly chart of the USD/JPY showing the break out from the long downtrend

usd vs jpy - weekly - 25 July 2012

Chart courtesy of

If I’m right and the BoJ does begin a programme of aggressive money printing, the Japanese yen is likely to begin a long downtrend that could prove to be one of the most profitable trades of the decade.

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