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No, this is not about those very scary-looking tsunamis, which are hitting Hawaii now.
The yen is still strengthening on Friday after the country’s biggest ever earthquake on record struck off the northeastern coast. The theory, so it goes, is that Japanese investors will bring funds back home from abroad, as the country begins rebuilding.
So here’s a handy table from Divyang Shah at IFR:
Table 1: Japanese Investment Abroad
(JPY tn; 2009 and 2010)
===================================
US 21.8
South America* 7.4
Europe 4.6
Australia 3.8
UK 2.4
Asia 0.9
Canada 0.4
Middle East 0.1
Total 42.1
====================================
* = Cayman Islands 5.2tn Source: MoF
Not great for US assets like Treasuries, then. But what of Japan itself?
Gavin Friend at the National Bank of Australia figures the quake has come at the worst possible time for Japan, which is already struggling with hefty deficits combined with ultra-easy and ultra-innefective monetary policy.
He reckons the BoJ will even be intervening (again) in the yen soon… :
But in the slightly bigger picture we cannot see any option other than the Japanese government going all out to aid economic recovery. This will involve issuing more debt (and worry about paying for it later rather than selling USTs at current USD/JPY levels to finance it) with the BoJ possibly doing more QE. Note Monday's two-day meeting will now be a one-day event. Prime Minister Kan and his ruling DPJ Party "“already incredibly unpopular – have little option other than to pull out all the stops …
Alongside the lost output in the shorter-term, this will reinforce the rate differential view against the JPY "“ that Japan remains light years from tighter policy "“ while the debt burden just gets worse. How long before the ratings agencies start to circle again? The disruption to oil storage installations and the possible additional oil demand required to offset the nuclear shutdown suggests importers will be active in USD/JPY too …
On the day we've said we're still looking for 82.00 -82.25 to hold even though that level has closed in fast. After the dust has settled "“ and we think we're talking about early next week "“ we'd expect to see USD/JPY start to grind higher again. If we're wrong on 82, we remain of the view the Strategy team has held for some months now "“ that the MoF will not allow USD/JPY to fall through the key 1995 low of 79.75 (or even get close to 80). Japan simply cannot afford to allow that level to go for risking a larger plunge that would unleash another pernicious round of deflation.
The last thing Japan needs is a strong JPY right now and alongside the assistance the government and BoJ will be unveiling in coming days will be a commitment to closely watch FX markets. If we're wrong on 82.00 and the pair slips towards 80, we'll be back in intervention territory "“ verbal at first and then overt if necessary. USD/JPY has only a couple of big figures downside and an awful lot of upside "“ even if the latter may take some time to fully play out. In a risk-off environment and with concerns building that EU politicians still have some ground to cover before agreeing to a "?competitiveness' pact at today's mini summit and grand EFSF plan on the 24-25th March, the CHF appears to be the standout currency to buy, not the JPY.
The yen a safe haven no longer then?
It’s worth noting too, that after Japan’s last big earthquake (in Kobe, in 1995) the BoJ began cutting interest rates. This led to a little bit of inflation in the following years…
Related links: Monetary policy in a time of natural disaster - FT Alphaville Is BoJ-bashing about to inflate the world? - FT Alphaville
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