When the massive earthquake measuring 9.0 on the richter scale first stuck Japan on 11th Mar 2011, most forex traders are expecting the Japanese Yen to depreciate against major currencies which include the US Dollar (USD) and the Euro (EUR). This was further reinforced by the decline in the NIKKEI stock index- after all, if people do not want to buy into Japanese stocks, there would be less demand for the Japanese Yen.
What surprised most traders however, was the sharp appreciation of the Japanese Yen in the aftermath of the disaster. The Japanese Yen was trading at 1 US Dollar (USD) = 83.0 Japanese Yen (JPY) on 11th Mar 2011. On 17th Mar 2011, the Yen has appreciated by some 5 percent against the US Dollar, rising to a peak of 1 US Dollar (USD) = 78.8489 Japanese Yen (JPY), or 1 Japanese Yen against 0.01268 US Dollar. To complicate things further, the Yen rose sharply after 17th Mar 2011 and now trades at 1 USD = 84.2863 Japanese Yen. Forex traders who panic sold on the Japanese Yen/US Dollar on 17th Mar and thereafter bought back the Yen are now staring at massive losses.
A similar story was encountered for JPY/EUR traders, where the JPY slumped to 1 EUR = 110.01 JPY before recovering to 1 EUR = 119.01 JPY.
The question remains on where the Yen will be heading next, and whether the continued failure by the Japanese Government to rein in the radioactivity at the Fukushima Nuclear Plant will have a long term effect on the Yen. Already, the long term credit rating for Japanese Government issued bond has been cut by Standard and Poor’s (for the first time in 9 years) to AA-.
It is widely predicted that that the Japanese Yen will have a long term depreciation against the Euro and the US Dollar in the long term. This is based on the following analysis:
1. The clean up of the radioactive at the Fukushima Nuclear Plant will be a protracted effort. Besides the environmental considerations, the relocation of residents within the 20km radius zone will place a Hugh financial burden on the government.
2. The usage of less clean and more expensive power sources in the aftermath of the Fukushima Nuclear accident will further rein in government spending.
3. Impact on Japanese economy – in the medium term, it is unlikely for major investments to be made in Japan as the focus is more on restoring the public infrastructures and the confidence of the Japanese themselves to recover from the earthquake. It will take at least 2 years to fully restore the economic growth of Japan and bring certainty to foreign investors.
4. Already, interest rate is at the lowest ever in Japan, at close to absolute 0. In terms of fiscal and monetary policy, interest rate can no longer be used as a lever to encourage spending.
We forecast that the Yen will trade at 1 USD = 90 JPY by the end of year 2011 and thereafter further slide to 1 USD = 93 JPY by middle of 2012. Against the Euro, we maintain similar forecast of 1 EUR = 129.0 JYP by end of year 2011 and 1 EUR = 135 JYP by middle of 2012.
Hopefully, the slump of the Japanese will be medium term at most, and not have a half-life of the radioactivity that is plaguing the country now.