Strategy

The strange new yen for the yen

With investors pushing up its currency, Japan's central bank is forced to step in.

Japanese central bankers recently intervened in currency markets for the first time in more than half a decade, scooping up U.S. assets to counter upward pressure on yen. The move was applauded by investors, who piled into Tokyo stocks after watching Japan’s currency woes push the Nikkei Stock Average into bear market territory in recent weeks. But the intervention is as confusing as Hulk Hogan’s recent Japanese air-conditioner ad (which shows the bare-chested wrestler singing in front of a backdrop of clouds).

When it comes to economic events in the Asian nation, where the government debt-to-GDP ratio is more than twice the U.S. level and consumer prices dropped for the 17th consecutive month in July, the only thing harder to figure out than Bank of Japan logic is rising demand for Japanese money.

According to numerous market watchers, the yen posted fresh 15-year highs against the U.S. greenback in September because it is seen as a safe haven by institutional traders who fear a double-dip U.S. recession. But when the Great Recession rocked global markets, Uncle Sam’s buck was billed as a safe haven. Back then, the general consensus was that the world’s largest economy will not sink to the state of absolute despair that has strangled the planet’s second-largest market for well over a decade.

Bill Witherell, an economist with New Jersey-based fund manager Cumberland Advisors, won’t even try to explain rising interest in the yen. “One thing is clear,” he says. “Investors are not being attracted by Japan’s macro performance nor the political situation. Japan is not Switzerland.”

Quoting Winston Churchill’s famous description of Soviet foreign policy, Marc Chandler of Brown Brothers Harriman, calls the yen conundrum a “riddle wrapped in a mystery inside an enigma.” But he has a clear explanation for the rising value of Japan’s currency. And that (drum roll here) is the yen has “more buyers than sellers.” Why that is the case remains unclear, but Chandler says the answer lies somewhere in the shifting circulation patterns of global capital.

When it comes to the yen, independent Wall Street economist Robert Brusca suggests tossing away explanations that can fit into a few column-inches in a newspaper. But a “coherent investment play,” he says, is not driving demand for the currency. Brusca notes China has been pouring investments into Japan, which has a huge current account surplus. “And when money does not flow out easily, the yen goes up.”

Whatever the reason behind the yen’s recent attractiveness, the Bank of Japan’s intervention makes no sense because taking on currency markets is typically a lost cause. As Chandler points out, the last time Japanese officials intervened in the foreign exchange market was a large-scale operation in late 2003 and early 2004. It sold roughly ¥35 trillion and did not manage to drive the currency lower against the dollar.

The BoJ action, of course, is easy to understand if you accept that embattled central bankers around the world are just as concerned about looking like they are in control as they are with the fact they are not. Perhaps they’d like to bring in Hulk Hogan to bodyslam the currency traders who are driving Japan policy-makers nuts.