Yen: Legend of the Fall?
By Ashraf Laidi
Despite the inherent uncertainty of global financial markets, and currency markets in particular, participants can almost always rely on the recurring nature of 2 practices in Japan over the past 10 years. The first practice relates to the release of growth figures. Upon announcing the nation’s quarterly GDP figures, the Japanese government habitually issues a surprisingly positive figure for the quarter with a simultaneous downward revision of the prior quarter. The downward revision of the previous period is overshadowed by the more positive number of the more recent period. The cycle then follows when the more current period finds its fate with a downward revision when the subsequent quarterly GDP figures are out. And as such has been this cycle for most of the past 10 years, when Japan sank in 4 recessions.
The other typical occurrence is the repatriation by some Japanese investors ahead of fiscal year-end book closing on March 31 and ahead of the end of the first half on September 30-- a practice that normally subjects the US dollar to downward pressure against the yen. While few pundits remained skeptical on the actual impact that such flows have on the currency, one cannot ignore the regularity of such repatriation and the potentially self-fulfilling impact on the yen.
Japanese repatriation of foreign-based assets becomes especially prominent when poor performance at home is exasperated by the deteriorating values of stocks. This week, the Nikkei Index tumbled to 19-year lows, a factor which surely accelerates investors’ selling of foreign assets with the objective of realizing some of the gains seen in global stocks, particularly US shares in August. Since attaining their July trough, the broad US and European stock indices rose 16% and 10% respectively.
The seasonality of foreign stock sales by Japanese institutions is clearly seen in the chart below. In the week ending August 23, Japanese investors were net sellers of 309 billion yen worth of foreign stocks, the first time sellers exceeded buyers since the last week of February--a month prior to the end of the fiscal year.
Also in the same week, Japanese dealings in both foreign stocks and bonds showed net purchases falling to 15.2 billion yen, their lowest level since mid June. Japanese investors’ unloading of foreign stocks did not reduce their attraction from foreign bonds due to falling yields in US and other bonds, offering the potential for capital appreciation.
The approaching end of the first half of the fiscal year is also pushing currency speculators to increase their yen positions in futures markets, producing a notable increase in the net purchase of yen contracts. The chart below also shows that the purchase of net contracts rose markedly from mid August till the last week of September.
The combination of the seasonality of Japanese repatriation at summer’s end with investors’ increased desire to sell foreign stocks to offset the unrealized stock losses at home, could give the yen a fresh boost against the dollar. The greenback could also see renewed woes amid the usually ominous earnings season in the US coupled with lingering uncertainty over the Iraq question, which could raise concerns of another stock market rout.
The chart below suggests that the breach below 117 can give way to double bottom region of 115.50-70. Accumulated yen buying can breach below the 114-115, which rests along the trend line support extending from the 79.78 low (April 1995) through the 101.36 low (January 2000). Subsequent dollar support seen at 113.80—the 50% retracement of the rise from the same April 1995 low to the August 1998 high of 147.62.
Japanese officials would certainly be expected to threaten with a yen-selling intervention once we begin approaching the 115 level. Whether threats will materialize into actual intervention shall depend on the speed of the yen’s acceleration. Note that the Bank of Japan’s interventions this year reflected an increased thresh-hold of tolerance, whereby each round of intervention was triggered at a lower than expected point. This time, the authorities could wait until the 114 level before mounting an actual intervention.
-September 3
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