Macro Wrap – 20 Years of Dollar vs. Yen

by Enis April 11, 2013 7:36 am • Commentary

The massive move in the Japanese Yen over the past 6 months has had a major impact on financial markets across the world.  When the world’s second-largest economy sees a shift in the price of its own currency in such a rapid fashion, money flows quickly accelerate into and out of various asset classes.  U.S. stocks have clearly been one beneficiary, as the SPX hit new all-time highs yesterday.

Given the importance of the weakening yen, what’s the long-term outlook after its 25% plus move?  Looking back at the past 20 years, there were only 2 other instances where the yen depreciated vs. the U.S. dollar for 7 straight months:

USD/JPY 20 year monthly chart, Courtesy of Bloomberg
USD/JPY 20 year monthly chart, Courtesy of Bloomberg


I’ve circled all 3 instances of 7 month streaks for this currency pair over the last two decades.  The move off the 1995 low in USD/JPY was the beginning of a multiyear move that saw cross move all the way to 140 by 1998.  The move in 2000-2001 was not as significant on a long-term basis.  In both cases, the cross consolidated for a few months after its strong move, before continuing higher.

While the monetary and political backdrop in Japan today is much different than those prior instances, human psychology is the same.  Given the strength and speed of the current move, I do think we will eventually see significantly higher levels in the USD/JPY cross, but in the short-term, a multi-month consolidation would make sense, based on both historical precedent and extended psychology.

What that means for global financial assets is less clear.  On one hand, the easy money is clearly benefitting certain assets like U.S. stocks.  But commodities have remained weak despite the free-flowing spigots.  In addition, exporting nations like China and Korea have already raised alarm bells about the competitive advantage Japanese exporters are gaining through this move.  U.S. carmakers have expressed similar concerns.  So while the Nikkei ramps higher, there will be correspondent losers as well.  If other countries start erecting protectionist measures, then the net benefit of easier money could be offset by the net negative of tighter trade restrictions.  For now though, investors seem content to enjoy the party thrown by the Japanese.