A possible sea-change for the Yen | The economic plane

Please note that as this coming Friday (Good Friday, 18^th April) is a holiday for all important Forex markets, there will be no OmiCronFX commentary on that day.

Since the end of 2012 Japan has been practicing a form of monetary and fiscal policy that has become known as Abenomics, after the Prime Minister who was voted into power in December of the that year, Shinzō Abe. He formulated and activated measures that were designed to stimulate the Japanese economy. One of the cornerstones of this policy has been the elimination of deflation, and a major tool was the weakening of the Japanese Yen, particularly as it stood against the US dollar.

The outcome has been a rise in Japanese shares and the Yen has, indeed, weakened considerably during Mr. Abe’s tenure as Prime Minister. Many investors link the two – they see a strong negative correlation between Yen valuation and the growth of the Nikkei 225, the most representative Japanese stock index.

Now there are influential voices within Japan that are questioning the efficacy of Abenomics. This tendency is influenced by a number of factors: the very large Japanese government debt, a fear of what excess inflation might do when and if deflation is eliminated and, perhaps more than any other, the effects on Japan of economic events that are taking place in other jurisdictions, most notably in the USA and Europe.

Now there is another element. This is the prospect of a period of consolidation, if not severe correction, in all equity markets. Experience shows that a falling Nikkei 225 index should be expected to correspond to a strengthening of the Yen. This could mean a reduction, as opposed to the rise that most Forex market participants have been long expecting, in the USDJPY rate. Technically, our own belief is that the chart above has been setting itself up for a fall.

The economic plane

I am indebted to the author of a new book, “Money Blood and Revolution”, by George Cooper, for the chart above. I have not yet read the work but the chart stands on its own in terms of interest. It indicates where the various schools of economic thought exist on a matrix which relates their belief in the stability of markets with their advocacy of the place of government in attempting to control the economy.

Those of us who got their early introduction to the subject through the good offices of the late and great John Murray, in the MBA class of Trinity College, University of Dublin, will be interested to see the Austrian School, of Schumpeter et al, holding exactly the same position in relation to a belief in the stability of markets with Marxism, although they are, of course, diametrically opposed when it comes to their stance on the amount of influence / interference that government should affect in the regulation of the economy.

I am looking forward to Mr. Cooper’s other insights.