Japanese leaders intervened for the third time this year as JPY strength below 77 yen/usd is clearly constraining a recovery in the world’s third largest economy. Japanese Finance Minister, Jun Azumi, announced a unilateral move with an additional pledge to keep selling in the future. The action took place because Japan believes the yen strength broke from normal economic fundamentals and linkages. Japan’s leaders are right. In the recent couple of months, the US economy has been the most resilient of the developed market major economic zones. Normally when the US economic growth rate picks up relative to other nations, the dollar strengthens. The FX flows related to the fear of a financial crisis in Europe have thrown a lot of normal relationships out of whack. The Yen has been a flight to safety currency even more so than the dollar. The reasons for this are varied and complex but market participants seem to agree flight to safety flows are taking place.
Japan’s exporters forecast a yen exchange rate in the mid 80’s according to surveys such as the Tankan. In a developed market world where growth and job creation are in short supply, there really are no safe haven exchange rates. Everything becomes a relative value trade coupled with a game theory analysis of which government and treasury is going to do more to reignite growth. One week if could be Japan intervening in FX markets, the next it could be Europe commencing a rate cut cycle, the next week could be the US announcing QE3. Emerging markets are where the growth is but there can quickly be capital outflows and illiquidity as global economic fears grow. Lastly using commodities as any sort of a safe haven is also fraught with numerous risks. Commodities like gold are volatile instruments which can move by large amounts in short periods of time. Investors who believe gold will be a nice stable store of value after its tremendous move higher after the past few years are kidding themselves. The market is filled with risks related to economics, currencies, commodities, and stock markets. The good news is that risk premiums are high for many assets so the investors who are willing to incur some risks have decent chances of earning good returns if the underlying analysis is correct.