Gregor Weekly Macro Note: Saturday 26 September 2009

• Gregor Macdonald
• September 26th, 2009

Let’s talk about the Yen. In the twenty years since Japan’s equity and property bubble burst, there have been at least as many theories about the fate of Japan’s currency as there have been false dawns, to the country’s economic malaise. For example, in M. Taggart Murphy’s book, The Weight of the Yen, Taggart forecasts a time when the JPY gets so strong on the back of deflation and the end of the carry trade that it completely levels the Japanese economy, and forces a long overdue restructuring. I wrote about this idea, and followed it to its most extreme conclusion, back in October of last year in Yen Dead Star Theory. At the time, it seemed like the final, terrible outcome to the multi-decade carry trade (think: Yen mortgages in London, Yen bonds for national engineering projects in developing nations, and of course the Japanese Housewife trader) was about to unfold. What’s surprising, perhaps, is that the Yen carry trade did indeed start to close at that time. And it appears the US Dollar is moving in to take its place.

This is why the strengthening action in the Yen this week had a distinctly different flavor, than the anti-risk and deleveraging rallies that have so marked Yen strength in previous years. For those of you who listened to my MacroTwits show on Sunday, 30 August, you will recall a very good discussion that evening just as the results of Japan’s election were coming through. Essentially, given the new political party that was coming to power at a time of gargantuan USTreasury bond issuance, we wondered that the Yen could start to enter (this article continues for subscribers through the membership gateway, on the right side of this page.)

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