Month end on Japanese yen

As Zero Hedge has noted before, we think the market was underestimating the severity of the crisis in Japan. As we looked at the numbers, we couldn't help but think that some were being a little optimistic in light of the macro factors at play. At month end, the market reacted sharply to almost consistently bad news coming out from Japan; unemployment, production, retail and the Tankan indices all came out below expectations. The few bright spots were instances where we were still seeing numbers that were abysmal in an absolute sense, were being benchmarked against an even lower consensus view and were typically following a dramatic drop in the previous period.

The long anticipated fiscal year-end yen repatriation was the trendy, foolishly optimistic view that was undoubtedly in the mix but was overwhelmed by the raw macro factors at work (see a pattern here??). The last minute plummet in the yen over the past couple of days probably took a lot of the wind out of the sails but going forward, there is still probably more room for the yen to drop.

Atleast part of the ZH weak yen outlook going forward is driven by a probabilistic expectation that the BoJ will further intervene on the open market to sink the yen. As we have covered the Japanese domestic demand story before and the export story has been well covered by most news outlets, we won't bore you with the why. Post-carry trade crash, the yen is historically strong and there is bound to be some desperation in the halls at METI headquarters in Kasumigaseki.

Separately, the Tankan numbers are interesting; after looking through, we will try to highlight any potentially important numbers.

March charts for USD/JPY, AUD/JPY, and AUD/JPY:





























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Commentary on Japanese demand

Through this whole crisis, the conventional wisdom has been that the yen was somewhat more insulated to the crisis than other currencies, due to the inherently low levels of leverage in the Japanese economy (courtesy of the 90s). Much of the price movement since then has been attributed to ex-Japan macro factors; the "safe haven" theory, Japanese repatriation due to fiscal year end, open market actions by BoJ, etc. There was some discussion of pain due to lower demand for exports but it hasn't been really explored in any great detail and typically been viewed as secondary to other factors, given the relative nature of FX.

It's important to look at the raw demand numbers to get a sense for what is really going on. BoJ released the industrial activity numbers last week for Jan 09. If we use the industrial activity numbers as a proxy for lagging demand indicators, the picture is much grimmer.

Below is the raw data for all industry activity (ex. agriculture, forestry and fisheries) and the three largest individual components for the all industry index. As expected, government services has been relatively stable, while industrial production has fallen off a cliff. Tertiary industry services has also moderately declined; while it is the largest individual component, it is frustratingly also not defined so it's up to our best guess. Industrial production is presumably driven by exports and domestic demand; to put it in perspective, the last point of comparison is the 2000/2001 bubble burst. The current crisis has killed demand by ~3x of the last recession in about a 1/3 of the time.


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Charts of The Day: Japan Mfg / U.S. Durable Goods Orders

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