The Japanese yen and other catastrophes

The positive case for yen weakness

The new 34-year lows in the Japanese yen have prompted a fresh bout of catastrophising about Japanese markets. Yen weakness is said to be a currency crisis in the making, with the Asian financial crisis the more or less explicit model. This sort of thing is not exactly surprising coming from the bad bunny blogger (not to be confused with the good bunny blogger), not to mention a certain Australian-based columnist. A more serious version appeared in the FT that also studiously refused to name the offenders and appropriately distanced itself from the thesis, although not without some equivocation:

Some have invoked the idea that this exposes emerging economy-like vulnerabilities in Japan. And foreign tourists turning up in record numbers and declaring on social media how cheap the place feels may have added to a sense of accelerated diminishment. But the hand-wringing, for now at least, feels misplaced.

Needless to say, this supposed crisis is almost diametrically opposed to the former catastrophising around the BoJ’s exit from yield curve control and negative interest rates. Those of you following along at home might recall that the change in Japanese monetary policy was (if not immediately, then at least over time) meant to trigger repatriation flows by Japanese investors, appreciate the yen and blow up the yen carry trade. In the event, the yen continued to weaken and the catastrophising has instead pivoted from the yen appreciation that didn’t happen to the post-BoJ tightening depreciation that did. The two narratives can only be reconciled by maintaining that that the future unwind will now be even more dramatic than before, but that is just kicking the old failed narrative further down the road.