It's been four years since the Fukushima earthquake and that's how long Japan's nuclear power plants have been shuttered. When Prime Minister Shinzo Abe took office in 2012 he vowed to bring the nation's reactors back on line. It's been a long road, but this week Japan will see the restart of at least one of its 50 or so nuke plants.
One of the consequences of the nuke shutdown was that Japan had to import large quantities of oil, coal and natural gas. This led to a rare and historic trade deficit, which I believe has been one of the main factors in the depreciation of the yen.
Many of you might be inclined to disagree with me and say that it was the aggressive monetary actions by the Bank of Japan that caused the currency to nosedive over the past four years. I have long argued that monetary operations were nothing more than asset swaps, where the banking system got more (or less) reserves in exchange for less (or more) government securities.
While the growth in the BOJ's balance sheet over the years has resulted in a larger base of reserves in the banking system, the reserves have done nothing; they just sit there in the banking system, as all reserves do, and they have had little or no effect on overall bank lending, which has remained tepid.
Indeed, if it were so easy to create inflation by conducting monetary operations then the BOJ would have solved Japan's deflation problem 20 years ago. Furthermore, how does one argue that the BOJ devalued its currency by engaging in balance sheet expansion when the Federal Reserve has done the exact same thing yet the dollar has gone up? You can't.
I will concede one point with the yen bears, though, and that is that the actions of the BOJ caused market participants to believe there was going to be lots of yen printing and caused them to sell yen ahead of that. This was nothing more than speculative selling and portfolio shifting.
On the other hand, there was the real effect on the yen's exchange rate that heavy petroleum imports created. Imports had to be "paid for" in dollars and to get more dollars Japan had to export more and in order to do that they would adjust the yen exchange rate lower. This is how it works.
Now with the nukes coming back, the yen's outlook is shifting. I would caution, however, that the country's transition back to nuclear power generation will be slow. As of right now a total of five reactors have been approved for restart, one is up and running in Sendai and the decision to get the other four going rests with local officials. They might decide to take their time. Who knows?
There are 19 more that have applied for approval and 19 beyond those that still have yet to apply. The six in Fukushima will probably never be restarted.
Slowly, but surely, as Japan's reactors come back on line we should see improving monthly trade numbers. This should get forex market participants thinking differently about the yen. A more positive tone could develop, which could lead to a recovery in the yen.