Morning Commentary: Land of the Rising Yen

Foreign Exchange - Morning Commentary
Land of the Rising Yen
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Equity markets around the world continue to move higher with markets taking a decisively glass half full mode as they are ignoring US-China tensions and focusing on the lifting of virus restrictions.  Despite equities moving higher, the global economy remains on track to decelerate at its fastest pace since the Great Recession.  During this same period, the yen depreciated substantially, leaving the question of whether or not history will repeat itself. 

Admittedly, history tends to repeat itself with some variation.  For example, the Tokyo Olympic Games, originally scheduled for 1940, was cancelled, creating an ironic parallel to the current environment.  However, the view remains that the current situation is different. 

When the yen was first established in 1871, it was set at parity (1 USD=1 JPY) with the USD.  USDJPY then depreciated to 2.5 after a series of events including the Great Kanto earthquake in 1923.  The Great Depression started in 1929 and caused sharp deflationary pressures.  To combat this, Finance Minister Takahashi expanded fiscal spending, pushing USDJPY to ~4 in 1932.  As Japan escaped deflation, Takahashi wanted to restore fiscal soundness, but was assassinated by rebelling military officers, leading to the continuation of fiscal expansion that further accelerated once Japan went to war. 

During the Second World War, there wasn’t a USDJPY market with a military conversion market used after the war ended.  It wasn’t until 1949 that a USDJPY market was established for general use with USDJPY set at 360 by the US military using various factors including inflation expectations.

Clearly, the global landscape now and back then are different, but we can still draw lessons from history.  Specifically, fiscal and monetary stimulus to heal economic damage are not issues themselves.  It’s how authorities exit these stimulus policies once the economy recovers that is critical.     
  • Japan’s Nikkei index is one of the top performing equity markets, on the day, as Japan lifted its nationwide state of emergency.  European stocks are also up as Germany announced plans to lift travel warnings for 31 European countries.  In the UK, the country has outlined plans to re-open retail outlets. 
  • Protests swept through Hong Kong over the weekends as pro-democracy demonstrators expressed their opposition against Beijing’s move to impose sweeping national security laws. 
  • US-China tensions continue to simmer with Beijing condemning the US’ blacklisting of 33 Chinese firms.  China’s crackdown on Xinjiang, which promoted the US’ actions, was defended as a counter-terrorist move.  Additionally, China’s central bank continues to let the yuan drift weaker with its fix being the weakest since early 2008. 
  • Negative interest rate talks remain alive and well in the UK as the BoE’s Chief Economist confirmed the bank is still looking at negative rates but did stress that reviewing and implementing are two separate things. 
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