Investors around the globe should pay attention to what is taking place in Japan as it undergoes what can be described as electro shock therapy as the Japanese government continues its mandate and publicly states that it wants to create a weaker JPY in order to spur its economy.
Since the middle of October in 2012 when the JPY was trading against the USD at a value of 78.44 the Yen has managed to weaken to today’s approximate value of 101.06. In the meantime the Nikkei has climbed from around 8577.00 in mid-October to today’s value of 14,235.00. Lastly the rise in interest rates in Japan based on the yields from their Sovereign Bonds has started to increase.
While some investors may be reaping benefits if they have been shorting the JPY long-term and have been buying the Nikkei index, alarm bells are sounding in some quarters about these current market conditions. The gains in the Nikkei have been fueled by the weakening of the JPY and a hope that this will improve export opportunities for Japan. However if the JPY continues to weaken and the value of the Yen is significantly weaker than it is as of today’s value it stands to reason that the yields on its bond markets will increase and interest rates could create other fault lines. In short Japan is hoping that’s its gambit creates economic growth and that it is able to manage a devaluation of its currency without causing other problems such as rampant inflation. Japan will also need the global economy to remain stable and improve in order to achieve its goals.
In the past few trading the sessions the Nikkei has started to witness volatility come into its domain. The Japanese index has suddenly seen a couple of trading sessions in which the market has had sharp declines. The notion that markets are seldom a one way street will certainly hold true for Japan just as it does for all other global bourses. After the gains its equities have been able to achieve since October, the Nikkei may be entering a sphere in which it no longer simply gains without gravity pulling the index back to earth. The JPY which has also continued to steadily weaken must be watched carefully. It remains clear that the Japanese government and BoJ is intent on continuing its devaluation and they have proceeded with careful steps. While traders can take advantage of this opportunity, they must also consider the daily gyrations that effect ranges and the use of leverage when taking a position which can equate into a quick and disappointing result. While the Japanese government has attained some of its short-term goals, it may find that the long-term consequences of its actions are not quite so tranquil and easy to manage.
The U.S. and U.K. will see very little volume come from their shores today with major holidays underway. Gold as of this writing is near 1390.00 USD and it may see some rather abrupt ranges today without full market participation.