By Greg Holden – After the government of Yukio Hatoyama came to an end in Japan, the election on June 8 of former Finance Minister Naoto Kan ushers in what some call a needed step to help Japan back into positive growth. But others have doubts.
Investors are now keeping a closer watch on Japan’s economic rumblings considering Kan’s political slant. Prime Minister Kan is a known fiscal conservative who has expressed dissatisfaction with the current price level of the Japanese yen (JPY). Might it be worth considering that steps will be taken by his new administration to lower its value?
This question has caused a stir in analysis circles as many attempt to speculate what Kan will do. It’s not necessarily his ruminations about the yen’s current level that have investors worried, many politicians express opinions on issues which they never plan on addressing while in office. Instead, it’s his history of being a politician who follows through with his convictions that spooks so many.
It doesn’t take a stretch of the imagination to think of him attempting a corrective measure to what he sees as one of the main issues affecting Japan’s growth. With a sudden boost in approval ratings, rising to 44% from below 20%, it appears Kan has some room to maneuver before falling out of favor, as so many Japanese politicians do during troubled times.
However, it should be worth noting that the primary currency combination of the USD/JPY seems to have revealed its Magic Number – this is what I would call the psychological barrier that the pair doesn’t seem to be able to breach. Despite repeated drops in the value of this pair, it doesn’t seem able to break past 88.00.
Kan may desire a weaker currency to boost Japan’s exports and aid the recovery of its equity markets, but it’s difficult to see the island currency gaining more strength than it currently has under any other circumstances.
Safe-haven currencies like the yen and US dollar are expected to drop as confidence rises. We’re beginning to receive reports that Greece and Spain are taking necessary steps to counteract recent difficulties, and they’re also beginning to see positive results from those steps, which has led to a beautiful rally in stock markets.
So the question becomes, will Kan even need to take steps to lower the JPY? Considering what’s happening, my guess is no. Such steps seem counter-productive and destabilizing to the market. But how’s a new Prime Minister to prove himself without doing something rash?
On the chart below you can see the clear downtrend spanning the last 3 years as well as the Magic barrier of 88.00. Even more significantly is the breach of the downtrend a few weeks back and the beginning of what looks like a modest upturn of the pair. Will it continue?
USD/JPY – Weekly Chart
Forex Market Analysis provided by Forex Yard.
© 2006 by FxYard Ltd
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