YEN TRADE LOOKS EASY HERE

3/17/11

The action in the yen in the wake of the earthquake/tsunami/nuclear power plant parade of horrors that has befallen that country is fascinating. While there has been plenty of volatility, the direction of the yen has been decidedly up since the chorus of horribles has stricken our closest Pacific friend.

Most attribute the strength of the yen to the repatriation trade as Japanese individuals and companies buy yen to bring the money home for rebuilding or just to sustain life and/or operation or, more properly, the markets act on the belief that Japanese will pursue such a course of action. Apparently, Japanese officials are skeptical of this explanation and, instead, blame the yen’s action on that omnipresent whipping boy “speculation.”

No matter what has led to the yen’s rise (As I write this, the U.S. dollar buys 78.99 yen), I think a terrific shorting opportunity exists for the yen for three reasons:

--The most obvious reason to short the yen is the problems that have befallen that poor nation. Despite the silly talk that rebuilding will provide an economic stimulus for Japan (the broken window fallacy), having ports destroyed, industry shut or slowed down, power supplies delayed or eliminated, and whole industries hobbled cannot be good for one’s economy and, hence, one’s currency.

--The BOJ is flooding Japan with liquidity since the onset of the crisis. Printing currency at prodigious rates does not strengthen that currency.

--As part of its rebuilding effort, one suspects, given Japan’s monetary history, that the BOJ, the Ministry of Finance, and other Japanese government entities involved in such matters will make a concerted effort to weaken the yen in order to give Japanese industry a boost in its recovery.

This is not necessarily a short term prediction, but one would think that the smart money should be betting on a weaker yen in the not too distant future.