The yen is rising. The CurrencyShares Japanese Yen Trust (FXY) is up 23% in the last five months. It dropped 6% from mid-December to a week ago, but rebounded that same amount in the last week.
Plot the FXY and the Nikkei 225 together and you’ll see a contrary image. Since mid-August, here’s how they’ve performed:
+23% FXY
-37% Nikkei 225
The reason is obvious: Japan is an export economy. The stronger the yen, the less profit when foreign sales are converted back into yen at headquarters. That’s why Japanese business leaders are pressuring government to pressure the central bank to intervene in currency markets and knock the yen back down. It takes only 90 yen to buy a dollar these days. Two years ago, it took 121. Against that -26% headwind on top of the evaporating auto industry, no wonder Toyota is shutting down its entire Japanese operation for 11 days between February and March.
Nissan has taken a different approach. Rather than wait around for the government to do anything meaningful — this is the same government that’s been economically useless for two decades straight, after all — Nissan has said that it will leave Japan if the yen doesn’t get above 100 to the dollar soon.
The yen was useful for a long time in the carry trade that saw currency investors take nearly zero-interest yen around the globe to invest at higher interest rates. Now that the world is gravitating toward Japan’s zero interest rate policy (ZIRP), the yen carry trade is over and currency traders continue selling the assets they bought with borrowed yen and paying off their yen loans.
In the past two years, the yen has been a great contrary signal on global stock markets. Look at the two-year performances:
+33% Yen
-40% S&P; 500
-53% Nikkei 225
-31% FTSE 100
Watch the yen as a backdrop to other market pressures.
