The yen actually strengthened over the past week. Was it really due to the (hardly) bullish comments by the Bank of Japan that the “economy has begun to stop deteriorating.”? If it was, then it was quite a leap of faith given that the key phrase was “begun to stop deteriorating.”
If it had been any stronger, then they would have had to have said that the economy was improving. However, very clearly, the statement stopped short of this type of clear statement.
So in other words, there’s no change but there’s obviously an interest to try to boost confidence in case it can boost domestic consumption. Given this has hardly improved in two decades it does seem an exceptionally over-optimistic comment. Perhaps they should have said “domestic consumption” is still in the doldrums.
Probably the most interesting comment to come out of the past few days was from the ECB President Trichet. Clearly he’s not impressed with the stimulus packages which he described as “completely extraordinary.”
He went on to comment that “There is a moment where you cannot spend and accumulate more debts - we are at that moment.”
Put into layman’s language it means that if the value of your assets has declined it is reckless to re-mortgage your house in order to be able to spend even more. No prudent household would do that. However, it seems that governments feel it is a perfectly acceptable way to organize the country’s finances.
Given that it is this which provoked the whole problem in the first place it’s actually quite shocking.
Does it have any impact on exchange rates?
Well, Trichet will be ignored as it’s more important to be one of the first to get in at the early stages of a recovery. The market is still absorbed with the pattern of growth and pullback and that there will always be growth… This will still mean that given America is normally a half cycle ahead of the European economy the Dollar is still favored.
As far as the yen is concerned it’s possible that we have seen the yen at its weakest against the Europeans. There will be pullbacks but the market is focusing on the fact that a recovery will benefit the Japanese economy through increased exports.
That shows just how fickle market economists can be. Just a few months ago they we selling Yen because it couldn’t survive with the price of good effectively much higher because of the yen’s strength. Now they are expecting Japan to benefit. but have forgotten that the stronger the Yen is the more problems Japan will have in making sales.
As I write, the yen has gotten stronger this morning and it may just move a little below 93.84 against the dollar but should then bounce. During this week I expect to see the Yen much stronger against the Europeans as well but a pullback will be due by the end of the week.
Ian Copsey
www.fx-forecaster.com
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