Record-high yen assaults
Japan By Kosuke Takahashi
TOKYO - Greed and fear move markets, one
popular proverb on Wall Street says. Speculative
market players, taking advantage of greed and
fear, are now assaulting Japan, seeking to gain in
the wake of the country's worst recorded
earthquake, subsequent big aftershocks, massive
tsunami, tremendous loss of life and nuclear
panic.
With nuclear fears on the Fukushima
Daiichi nuclear plant rising, speculators are
aggressively buying the Japanese yen
amid cat-and-dog surging demand for the currency,
pushing up the yen to a record post-World War II
high of 76.25 to the US dollar on early Thursday
in Tokyo. The yen at this level will likely hit
the profitability of Japanese exporters such as
Toyota and Sony in coming months, although it can
help lower prices of imported
crude oil and other raw
materials.
Why do speculators buy the yen,
instead of selling it, as geopolitical risks of
Japan on nuclear radiation are rising and the
Japanese economy is expected to slow down in
coming months due to massive earthquake damage?
The prevailing notion in the markets is
that global money managers and hedge funds, as
well as Japanese mom-and-pop investors, are
increasingly seeking to reduce investment risk due
to the global downturn in stocks, and that those
investors are unwinding so-called yen carry
trades, which under less volatile financial times
allow traders to capitalize on Japan's ultra-low
interest rates to buy higher-yielding assets in
Australia and elsewhere.
But the real
reason is not a simple yen-buying based on risk
aversion. They are actually taking big speculative
risks to bet on the yen's further rise by buying
it. They simply buy the Japanese currency, as they
think that people want to buy the yen in times of
emergency world-wide.
Yen-buying and
losses in the stock markets started to pile up
late morning New York time on Wednesday after
European Union Energy commissioner Guenther
Oettinger warned of "further catastrophic events"
in the coming hours in Japan, saying they "could
pose a threat to the lives of people on the
island".
He said that one of Japan's
nuclear plants was "effectively out of control",
and that the situation could continue to
deteriorate. Europe's energy chief later played
down his warning, as his spokeswoman said his
comments were based on media reports, his personal
fears and so forth after the comments alarmed
global financial markets.
Then, losses in
the stock markets and yen-buying accelerated after
the United States Embassy in Japan urged American
citizens living within 80 kilometers of the
quake-hit Fukushima nuclear power plant to
evacuate as a precautionary measure.
Nuclear pundits around the globe have
mentioned Japan’s possible nuclear crisis as being
equivalent to the 1986 Chernobyl accident. They
seldom mention a basic but important fact. Unlike
Chernobyl, Japan managed to automatically shut
down all the nuclear power reactors in Fukushima
immediately after the earthquake on March 11. This
is quite different from Chernobyl.
"The
yen is being bought as nuke fears are exaggerated
abroad," said Yuji Saito, director of the foreign
exchange department in Tokyo at Credit Agricole
Corporate & Investment Bank. "By taking
advantage of those exaggerated fears, speculators
aimed to trigger massive stop-loss orders of
yen-buying at the level of a previous record-high
of 79.75 yen against the dollar. They succeeded in
doing so by triggering those stop orders amid very
thin trading between New York and Tokyo times."
Saito said now that speculators had
finished hitting another record-high of the yen
against the dollar, they fear intervention by the
Japanese authorities in the currency markets by
selling the yen, and have already started to sell
the yen by riding on possible future intervention
by the Ministry of Finance and the Bank of Japan.
"Crucially, FX [foreign exchange] carry
positions have likely been wiped out, without a
severe jump in volume, so overall, conditions for
risk appetite/releverage actually appear to be
reasonable and there will be investors with strong
interest in buying cross-JPY," UBS wrote in a
report on Thursday. "Of course, if the news flow
deteriorates yet again, the market could yet turn,
but overall last night's price action seems very
FX-specific and stops/barriers driven than any
indication of fundamental fear-induced
deleveraging."
Expectations are rising
that central bank officials and the Group of Seven
finance ministers will decide to assist Japan's
recovery efforts and also approve, or at least
understand, Japan's currency intervention at an
emergency meeting by phone on Friday. The Group of
Seven is composed of the United States, Japan,
Germany, France, the United Kingdom, Italy and
Canada.
"Japan will be forced to sell US
Treasuries if it really needs the costs of its
reconstruction," Saito said. "This would be
severely damaging to the US. So I think the world
led by the US will help Japan this time."
As of January 2011, Japan holds $885.9
billion of US Treasuries, the second-largest
holder, following China's $1.15 trillion.
Kosuke Takahashi is a
Tokyo-based Japanese journalist. He is a regular
TV commentator at Nikkei CNBC in Tokyo. He
previously was a currency reporter for Bloomberg
News in Tokyo under the pen name of Kosuke Goto.
He can be contacted at letters@kosuke.net
(Copyright 2011 Asia Times Online
(Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
