The Puzzling Selling Trend in the Yen

 | Feb 04, 2013 | 4:00 PM EST
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I've been watching the selloff in the yen for the past month and a half, and I continue to scratch my head in wonderment at just what is behind this. Sure, I know that Japan elected an old "new" prime minister, Shinzo Abe, and he has been all bluster about what he is going to do to stimulate Japan's economy. I get it that speculators sold the yen in anticipation of Abe's return to power, but the currency's severe slide since then has me thoroughly confused.

Since the election, Abe has been doing a lot of talking, but that's about it. The proposed stimulus that he has been talking about still has yet to happen. Moreover, the Bank of Japan, the institution that yen bears have been hanging their hat on, recently rebuffed Abe's demands for more asset purchases, saying that it would do so only in 2014. That also assumes that asset purchases have any impact on the yen at all, which they don't.

Anyone who understands central bank monetary operations realizes that asset purchases merely change the composition of the assets held by the public; they don't create any "new" yen. Of course, the government of Japan can print yen by engaging in massive-scale deficit spending, but it is not doing this. The idea is not even on the table. The only thing that is on the table is a very modest increase in government spending, which is likely to be entirely offset by higher taxes.

Furthermore, Abe has a history of fiscal conservatism, so why does everyone now believe he has changed his stripes? Historically, he has displayed an aversion to deficits. His passion, rather, was in matters related to Japanese nationalism and foreign policy. When it came to the economy, he didn't seem to have much heart to make the bold moves, and when it came to the budget, he preferred to err on the side of fiscal restraint.

So I really don't know what all this yen selling is based on. On the other hand, I can see who is doing it, and from what I see, there's good reason to question the move. A quick perusal of the Commodity Futures Trading Commission's Commitment of Traders report shows that speculators are heavily short the yen. And the small speculators, who are probably the least sophisticated, are the most short. They're short five contracts for every one that they're long. On the other hand, commercial traders, normally considered the "smart money," are heavily long the yen.

Admittedly, there is one legitimate bearish factor hanging over the yen, and that is Japan's steep current account deficit. Japan normally runs current account surpluses, so this negative position is quite unusual and represents a net "leakage" of yen into the global foreign-exchange markets. We know the cause of that trade deficit: It's the huge oil import bill that Japan has had to pay since shutting down its nuclear reactors in the aftermath of the 2011 earthquake and the Fukushima nuke plant meltdown.

However, those nukes may be restarting soon. Abe is firmly committed to a restart, and it's just a question now of reconciling Japan's nuclear safety concerns with the need for cheap electric power. Progress is being made toward that end, and if and when the nation's nukes get turned back on, Japan's trade deficit will likely disappear quickly, and with it, the gains on those short yen positions. Personally, I'd rather be a buyer of yen here rather than a seller.



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