Yen as a “Haven” Currency? Don't Bet On It     

• The now fading growth scare had investors shifting from commodities and basic materials sectors and stocks to more defensive names, and renewed talk of JPY as a “safe haven” play. In our view, the only “haven” aspect of JPY is that the USD is in another secular bear market and investors are desperate to reduce USD exposure and JPY is an incidental beneficiary. Granted, while Japan’s debt is fast approaching 2X GDP and far worse in absolute terms than US debt, it is largely self-financed from Japan’s JPY1.5 quadrillion pool of savings. Horrible demographics, plunging savings rates and a shrinking BOP surplus show however that Japan cannot self-finance its soaring government debt indefinitely.
• Work done by the Institute for Monetary and Economic Studies on net interoffice foreign banks in Japan suggests that the real yen carry trade has all but been completely unwound in an era of zero interest rate regimes. The recent buildup of open interest on Japan’s financial futures exchange suggests Japanese individuals trading on margin are again betting against the yen, while long speculative positions as measured by the CFTC in the US are again increasing, they remain substantially lower than December 2008 highs.
• The only evidence of late in the aggregate numbers of JPY demand are the net portfolio inflows from Japanese investors selling US treasuries and other offshore funds being repatriated into Japan, which recently has exceeded sporadic net buying of Japanese bonds and equities by foreigners.
• Given the history of overseas investments by Japanese institutions (i.e., structural net outflows), the formation of new multicurrency investment trusts by asset management firms in Japan, and leveraged retail forex trader bets against JPY in favor of higher yielding currencies, JPY will have trouble sustaining upward momentum, while the lack of a carry trade will prevent any significant weakness.
• Moreover, the impending August 30 general elections could mark a major turning point in Japanese politics, with the ruling Liberal Democratic Party losing power for the first time since WWII, which could effectively shut down the Diet for the next two months and trigger profit-taking in JGBs and JPY.

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