How Strong Is the Yen Barrier?

05/21/2013 8:30 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

So far, Japan appears to have control of its currency devaluation, but will it be able to stop the process? MoneyShow's Jim Jubak explains what could happen.

So the real question is how fast the yen falls. It's not a question of how far; it's the speed of the fall that's really crucial at this point.

OK, so we're at 102 and change, which is the lowest the yen has been against the dollar since really the end of 2008. The consensus is that we're going to finish the year at 110 to the dollar; that's the Wall Street opinion at this point. So we'll probably, you know, clearly take out 105.

The question is how we take it out, because what the market is looking at, at this point, is starting to get fears that we will move too fast. This process will become self-reinforcing, the momentum of the fall will be significant, and that therefore when you tear through 110, it's going to go out of control. We're going to head to 120, 130, and basically there won't be any stopping it. That's the fear.

It's a fear that so far is not made up of any real facts or experience, but I think that if we start to get what looks like more like a free fall of the yen—where every day it's down, it never rebounds, it opens low and then moves lower during the day—I think when that happens, the fear of what the yen might do will increase, and that changes the dynamic of the market.

Right now, a lower yen is good for Japanese stocks, but if you get to a point where people are really afraid that the yen might fall faster than expected, I don't think that is good for Japanese markets at all. And I actually think the whole process starts to reverse.

We haven't gotten there yet, but that's one thing that I'm looking at, to see when it might be time to get out of the Japanese financial assets.

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