Why is the JPY so Weak And Is There Still a Potential Trade?

A weak currency still offers you opportunity

Economic Crisis
The weak Japanese JPY has fluctuated over the year, but the story remains alive. sorbetto | Getty Images
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Things were looking dim for the Japanese economy in 2012 for a very odd reason. That reason was that their currency value was at all-time highs. In fact, in the mid-1980's the exchange rate of Yen to USDOLLAR was that $1 = ¥300 and this was excellent for the Japanese economy. 

An Introduction into Abenomics & The Weak JPY

In late 2012, Japan was hopeful that a new candidate for the Prime Minister named Shinzo Abe, could bring Japan out of the deflationary slump.

Deflation, if you're unfamiliar with the concept, is an economic silver bullet. The reason deflation is such an economic growth killer is that when consumers see that prices are slowly falling over time, they are more likely to hold off on buying big-ticket items that help spur the economy. This is a fundamental phenomenon that can easily affect the price action on the charts. 

Shinzo Abe, in his campaign, discussed an approach to the local economy that would help spur Japan's competitiveness in exports and allow business to be excited about doing business in Japan by helping spur inflation that had virtually been non-existent since the 1990's in Japan. The methodology has been a three-fold approach known as "three arrows". 

Arrow #1 was to build and complement a form of monetary policy in buying sound international investments in massive never-before-seen amounts which require selling JPY to own US Debt known as Quantitative Easing or QE. Fun fact, Japan's purchasing of US Debt is so large that they're about to surpass China as the largest owner of US Debt.

 , keeping interest rates low, and providing forward guidance on how the Japanese government will support the economic goals to fight the ugly monster of deflation.  Arrow #2 is a nimble fiscal policy that allows the Japanese government to provide support to the Japanese economy however they see fit.

Arrow #3 is a reformation of Japanese structure (which is needed still after the Fukushima tidal wave on March 11, 2011) and will assist in raising domestic investment and trend growth. 

The Purpose of the Fight

As mentioned earlier, in the mid-1980's, things were going excellent for Japanese automakers and electronic makers because they had a growing economy with a weak home currency (JPY) that made their products all the easier for Europe, US, or other Asian currencies to buy as their cost of production remained fixed. As an example:

When USDJPY was trading at ¥200.00, an internal cost of production for Honda could be at ¥2,000,000 which equals $10,000 USD. If the car is sold at $20,000, then the profit margin is $10,000 = ¥2,000,000, and everyone on both sides of the ocean are relatively happy. This was the scenario in the late 1980s. 

Fast forward 24 years later to 2012 and the JPY was stronger to the tune that USDJPY was trading at ¥80.00 so that it only required ¥80 to buy $1 USD. Taking the same example before, Honda, could keep the same cost of production of ¥2,000,000 which has a USD equivalent of $25,000. If the car sold at $20,000, then the profit market is now -$5,000 = ¥2,000,000 and business in Japan is no longer competitive on a global scale.

This was the scenario as Shinzo Abe took office and promised to help the Japanese economy by launching the "Three Arrows" which would effectively weaken the JPY. 

What's Next?

The most common questions that Forex traders have been understandable, what's next? Simply put, the trend looks to continue as Shinzo Abe is still in the process of implementing the "Three Arrows" which could continue to weaken the JPY. Additionally, the potential rate hike on December 16th by the Federal Reserve could also help strengthen the US Dollar as the JPY continues to weaken effectively putting pressure on both sides of the trade. 

Of course, this article is not meant to be a trade recommendation, but it's helpful to know why the JPY has fallen against the US Dollar and many other currencies since the low in  2011.

While this trend could continue, you could also see other currencies weaken against the US Dollar and Strengthen against the Japanese Yen.  This type of spread between two currencies help build up the Carry Trade, and this could become a strategy worth playing again in 2016. 

Trade Well.