Investors: Ignore Japan’s Yen Devaluation Game at Your Peril

All the talking heads are frothing at the mouth with the huge news out of Japan last week. I’ve read and watched countless articles and interviews trying to decipher what the outcome will be from this huge monetary experiment, and the great bulk of it has not been good.

I now check the Japanese Government Bond (JGB) yields a few times a day after the massively volatile moves that occurred at the end of last week. I think it’s very interesting that volatility circuit breakers were triggered twice in the Japanese Government Bond’s over the last week.

What that means is that the second largest bond market in the world was closed due to the immense volatility that was unleashed by the news that the Bank of Japan (BOJ) will double its monetary base over the next couple of years.

The BOJ Governor is playing with fire, but it will be investors that get burnt if they don’t sit up and take notice. Make sure you’re not one of them…

After the announcement yields on ten year JGB’s fell from around 50 bps to 33bps and then catapulted higher, to around 66bps before the circuit breakers kicked in.

I noticed on Tuesday that the BOJ bought a huge amount of bonds, which caused a quick fall in yields to around 44 bps, but then yields began climbing again and are currently sitting on 63bps as I write. If anything I see that as a bearish sign for the JGBs, and I would expect to see further rises in their yields in the future.

US Dollar/Yen Monthly Chart



I think this monthly chart of the US/Yen (USD/JPY) says it all. The last couple of years trading has seen a false break of the 1995 low at around 80 Yen and now the US dollar is shooting higher (Yen collapsing).

When you look at the monthly chart and compare the price action to the move we saw between 1995-1998, it doesn’t seem so outrageous to say that the Yen could head towards the 1998 level of 147 over the next few years, and maybe even sooner if the exodus from the Yen gathers steam.

A collapsing Yen is huge news, and it’s necessary to step back when big news like this occurs and think about the repercussions.

The weak Yen has been a boon for the carry traders over the last six months. I’m sure you’re aware of the correlation between the Euro/JPY, Aussie/JPY and our stock market.

Euro/JPY and AUD/JPY vs ASX 200


When you look at a chart like the one above the strong rally in stocks over the past nine months makes a lot of sense. Investors’ confidence that the BOJ would start printing madly has seen them borrowing in Yen and investing offshore.

Since the announcement by the BOJ last week, the collapse in the Yen has gathered steam and both the AUD/JPY and the Euro/JPY have leapt higher.

But our stock market has not kept pace. It appears that the correlation has weakened somewhat. But the fact remains that while these two currencies are shooting higher it will be very difficult for our market to sell-off very far.

Large Japanese investors are now looking for the exits out of the Yen and are parking their cash wherever they think is safe. That means US Treasuries and even European bonds (Spanish and Italian yields actually plummeted after the announcement by the BOJ) could be bought in size.

Australia won’t be left out because we have a stable currency and high yields relative to the rest of the world. Therefore we could see the Aussie dollar trading stronger for longer even though commodities have been under pressure. Yields on our government bonds could also come under pressure and that would also create buying in our banks and other high yielding stocks.

Don’t Forget This

Last but not least I would definitely expect gold to catch a strong bid after this news. Greg Canavan of Sound Money Sound Investments pointed out an article that shows that gold inventories at Comex have plummeted recently.


According to the article ‘stocks of gold held at Comex warehouses plunged by the largest figure ever on record during a single quarter since record keeping began in 2001.’

The article finishes with the ominous comment that:

While mainstream voices question whether or not gold is still in a bull market, smart money appears to be questioning something else. They appear to be asking themselves, “Do we want to continue storing our physical metal within the Comex system? How can we best whisk it away from fraud, theft, or bankruptcy (including our own)?”

The timing of this trend change is also quite shocking, as it’s happening during a time in which public sentiment towards the metals are at their worse levels in years.

The boy who cried wolf has certainly cried many times over the years with regard to the Comex, but if there was ever a time to be concerned of a major market event or default—now might be it.

Gold was in all sorts of trouble last week, with prices nudging below multi-year lows. But since the ‘print until things get better’ announcement we have seen a sharp turnaround in prices. Gold stocks are also starting to attract buying interest at extremely oversold levels.

My view is that the Japanese Yen will come under far more pressure than most people expect. I also think their bonds are an immense accident waiting to happen. How Kuroda could think that gunning for 2% inflation and holding down bond yields was even remotely possible is beyond me.

The arrogance of the central planners knows no bounds. I really hope Mr Market has the guts to stand up to him and give him a big kick in the pants.


Murray Dawes
Editor, Slipstream Trader

From the Port Phillip Publishing Library

Special Report: TORRENT SIGNAL 3

Money Morning: What Japan’s Economic Disaster Means for Australia

Murray Dawes is the Editor of Pivot Trader and contributing Editor at Money Morning. He was one of five, from 5,000 applicants, chosen for a graduate position with the Swiss Banking Corporation — now part of banking giant UBS. The bosses quickly cottoned on to his potential and pushed him up the ranks as a futures broker on the floors of the Sydney Futures Exchange. Murray later broke out on his own and developed custom trading systems to trade leveraged financial instruments like futures. Due to his success, Murray became the ‘hired gun’ trader for Australia’s rich and famous. Today, Murray runs a trading service through Fat Tail Investment Research to help everyday Aussie investors use his advanced trading methods.

Money Morning Australia