Japan’s earthquakes (Kobe 1994 and Tohoku 2011): the effect on yen

One month on from the Japanese natural disaster on March 11th, we saw this as an interesting opportunity to compare the currency market’s response with the earthquake that struck back in 1994.

On January 17th 1994, a 7.3 magnitude earthquake hit Kobe; killing over six thousand people and causing ten trillion yen worth of damage (amounting to roughly 2.5% of Japanese GDP). The yen proceeded to strengthen by 18% against the US dollar in the space of three months, before almost halving in value in the subsequent three years.

So how does this compare to yen’s response to this most recent disaster?

The Japanese currency did appreciate, but only by 5% against the greenback and in the space of just 5 days. This climb was reversed within the following five days as the world’s G7 Central Banks intervened to curb further yen appreciation. Since that date the yen has continued to steadily lose value as the market picks up on the lower growth potential and the expectation of rock bottom interest rates in Japan for some time to come. Indeed the yen is currently down at a 7-month low with further room to drop.

The natural market response (yen investment) in the wake of last month’s earthquake was cut well short by the unprecedented and prompt Central Bank intervention. In the current climate, the Bank of Japan is simply unwilling to allow its already weak economy to suffer the serious knock to its exports that a stronger yen would amount to. Obviously we are yet to find out whether the yen will devalue to the same extent as in the late 1990s, but the current forecast is for continued depreciation on the basis of weak fundamentals.

The USD/JPY rate currently sits at 85 yen. Forecasts 12 months out expect to see the US dollar reach 100, but the 144 level reached in 1998 does at this point seem very far-fetched, particularly as the Fed are hardly in a hurry to tighten monetary policy either.

Richard Driver
Analyst – Caxton FX


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BoE sticks, ECB twists.

Today it was announced that the BoE left the interest rate unchanged at 0.5%, whilst the ECB announced a quarter percent rate rise to put the eurozone base rate at 1.25%. Given that these decisions were widely predicted, the market response to the news has been somewhat muted.

The ECB press conference was of more interest. Trichet’s comments may not have triggered any significant movements but we do think they could have signalled an end to the euro uptrend that we have seen over the past month. Trichet refused to commit to a further rate rise, adopting a wait-and-see approach. If anything his comments suggested that the rate rise was more at the “once-and-done” end of the spectrum than, the “first-of-several” end.

Significantly, Trichet omitted the phrase “strong vigilance” with regard to monitoring inflation levels, reflective of a less ECB hawkish stance. He certainly reiterated that price pressures would be closely watched, but there’s reason for uncertainty surrounding ECB monetary policy going forward, which contrasts with broad expectations that the BoE will hike rates at least by July.

As well as a broadly euro-negative ECB press conference, the single currency has also come under some pressure today in light of last night’s Portuguese bailout request. Talk of the markets turning their attention on to Spanish debt issues has created a renewed air of uncertainty around the eurozone’s fiscal problems. We have held the view over recent weeks that the euro is overvalued and today’s announcements appear to have given further credence to this view.

In other news, Japan’s misery continues as another earthquake strikes the northeast of the country. It’s fortunately not on the same scale as last month’s quake so we can be hopeful that there’ll be considerably less devastation caused. Global stocks have fallen on the news but the currency markets remain as yet unpeturbed.
Richard Driver
Analyst – Caxton FX
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Japan announces a major round of quantitative easing: how will the yen fare in response?

Reacting to the devastating impact of the earthquake that struck on Friday, the Japanese central bank has announced its intention to pump a record ¥15tn into the economy ($183bn). This follows the reaction of the Reserve Bank of New Zealand to the earthquake that struck Christchurch, which opted to cut rates by 0.50%. With Japanese interest rates currently at next to nothing (<0.10%), the Bank of Japan clearly can’t follow suit, and has therefore opted to loosen monetary policy through flooding the money markets and buying government bonds.

The two countries’ approaches are alternative ways of achieving the same basic goals - to give consumers ‘a break’ in amid social upheaval and to provide support to fragile economic growth.

The so-called policy of quantitative easing that Japan has announced this morning invariably has the effect of weakening the economy’s national currency. The US Federal Reserve’s ‘QE II’ program has been responsible for the dollar’s woeful underperformance over the past year or so. Money-printing increases supply, thus weakening the currency as demand eases.

Accordingly, the yen declined against 13 of its 16 major counterparts as markets reacted to the news. However, just as the New Zealand Dollar did in the immediate aftermath of its rate cut last week, the yen has rebounded relatively strongly. There is a sense that New Zealand’s economy may eventually benefit from Christchurch’s disaster, with its construction sector in particular expected to enjoy strong growth. The same was thought of the Japanese construction sector but the apparent devastation suffered in the country’s north-eastern region seems set to provide a genuine setback to the Japanese economy in 2011. The country has suffered major damage to its infrastructure- most notably its roads and highways, factories and nuclear plants.

Fundamentally, we can be pretty confident of one thing- the yen will not strengthen this year. The Japanese government has this morning said as much. It threatened intervention to curb any sudden yen appreciation, asserting that it “will take decisive steps if necessary” (indeed the BOJ acted on their threat in September last year, though the impact was fleeting). So anyone hoping for a yen appreciation to mirror the aftermath of Japan’s last major earthquake in 1995 will be disappointed.

Behind the government statement is the concern that Japan is an export-dependent country which relies on weaker exchange rates particularly in times of low-growth. When a government makes this sort of statement, market appetite for the related currency is understandably dampened.

Will the yen decline? Well, the scale of the disaster is continually being revised up, and in light of this morning’s government statement, the yen could be set to weaken despite a thus far robust post-quake performance. In addition, we see risk appetite increasing over the course of 2011 and anticipate that funds held in yen will be redirected to higher-yielding, riskier currencies.

Richard Driver
Analyst – Caxton FX


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Tsunami hits Japan- how have the currency markets responded?

Japan has suffered from one its most powerful earthquakes for a century, unleashing a devastating tsunami across its northern coast. Today’s events follow last month’s earthquake in New Zealand, and January’s flooding in Australia. Japan represents the world’s third largest economy and the effects of this disaster are being felt throughout the global financial world.

The immediate response to the quake saw the Japanese yen fall across the board. This is understandable; it comes only two days after Japan announced that its economy slipped back into contraction last quarter. However, the market’s slightly longer-term response to the quake is somewhat counter-intuitive.

Since its initial dip, the yen has rebounded very strongly against all its counterparts as the markets. Why? The yen is one of the world’s few safe-haven currencies, which investors turn to in times of uncertainty. The earthquake may have occurred in Japan, but the global financial markets are intertwined and the widespread concern that has been triggered has seen the yen appreciate impressively. Market appetite for safety had already been heightened this week amid soaring oil prices, turmoil in the Middle East and North Africa, and eurozone debt concerns – this earthquake merely confirms this recent investor mindset. Accordingly, other safe-haven currencies such as the US dollar and the Swiss Franc have today strengthened against riskier assets such as the euro and sterling.

So will the yen continue to benefit from the earthquake? This will not be clear until the extent of the damage to the Japanese economy is ascertained. If Japan’s last major earthquake in 1995 is anything to go by, then the yen will continue to appreciate impressively. But the yen has heavily underperformed this year and with Japanese interest rates low and growth prospects poor, it will take prolonged risk aversion for this downwards trend to be reversed.

In other Caxton FX-related news, it was excellent to see fellow analyst Duncan Higgins quoted by Reuters today on his UK rate rise forecast.

Richard Driver
Analyst – Caxton FX


For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.