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A tentative stability in Japanese stocks today
05/28/2013 1:43 pm EST
So exactly what happened while U.S. markets were closed on Monday for Memorial Day?
Two things—one I’d call an effort to manipulate sentiment and one I’d call inside baseball in the currency market.
The rout in Japanese stocks last week began with fears that the rise in yields on Japanese government bonds—itself related to fears that the Federal Reserve would end its program of bond buying earlier than expected—would short circuit the Bank of Japan’s plan to flood the market with yen. The bank’s goal of higher inflation would mean, the reasonable fear went, higher bond yields and that would end the central bank’s weak yen policy (and not so incidentally crush earnings at Japanese banks.)
In a Monday speech Bank of Japan Governor Haruhiko Kuroda attempted to assuage those fears by simply asserting that he saw no signs that investors had “excessively bullish expectations.” Banks and the financial market could easily cope with modest increases interest rates since economic growth in Japan would result in greater demand for loans and rising net interest margins.
The speech didn’t do the trick. Japanese stocks fell again on Monday. The Nikkei 225 dropped another 3.1% on Monday while U.S. markets were closed and the yen continued to rally against the dollar.
Today, however the Nikkei is up and the yen is down.
My suspicion is that this relatively little to do with vague comments by Bank of Japan board member Ryuzo Miyao reminding markets that the bank’s policies are designed to weaken the yen. I think everyone knew that.
I think the recovery/bounce today has more to do with the details of the currency market. A lot of traders who were long Japanese equities were short the yen as a hedge. When Japanese stocks fell 10%, traders closed out some of those short hedges since they simply didn’t need as much in hedges. That, plus fears that the yen rally would run for a while, fed into the rally in the yen.
The yen also looks to be in a trading range between 99.9 and 103.5 to the dollar. When the yen rallied to the 100 vicinity that reset the risk reward calculations. If you thought the Bank of Japan would intervene strongly to prevent the yen from undoing all of its descent against the dollar, betting that the yen would rally to 99 or better was a riskier bet than a position looking to profit from the yen retracing its move back to 103 to the dollar.
All of this suggests that the recovery in Japanese stocks and the renewed downturn in the yen are hardly strong trends at the moment. I think you can say that the Bank of Japan and traders’ forecasts of what the bank will do have stabilized the yen and Japanese stocks, but that the stability is tenuous and depends on news/rumor/sentiment about the Federal Reserve and on yields in the market for Japanese government bonds.
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