Fundamental Forecast for Yen:Neutral

Confidence is a pretty important thing in a financial system. After all, in a fiat-based monetary system, all that we really have is faith. There’s no gold or silver backing the currency, and while I’m not saying that’s a ‘good’ thing since pretty much all of those regimes have failed, faith is of utter importance because, should trust wane investors may just sell out of your currency at an uncontrollable pace. This could lead to significant currency weakness as investors flock to anywhere but your currency, and all of those goods that you have to import all of the sudden begin to get very, very expensive. This is one of the reasons that negative rate-regimes have been avoided for so long: It could be potentially playing with fire (the inflationary kind). And this inflation isn’t of the ‘healthy’ variety. Just ask Russia. This even began to show signs in Canada earlier this week with reports of the Great Cauliflower Crisis; where four simple heads of Cauliflower could buy a full barrel of Oil. But this isn’t about cauliflower; we’re talking about history here.

The Bank of Japan shocked pretty much everybody watching by pulling rates into negative territory. I’m not aware of anyone that saw this coming or even thought of it as being a possibility. As a matter of fact, until a leak hit news wires in Japan just ahead of the announcement, the prospect of negative rates had been seemingly eliminated by the man at the top of the BoJ himself, Mr. Haruhiko Kuroda, just two weeks ago. Just before flying to the World Economic Forum in Davos, Mr. Kuroda told Japan’s parliament that he wasn’t even considering negative rates. And this made sense: Even at the lows of this thus far painful year, as panic was at an apex, the Yen was still 54% weaker against the US Dollar compared to the pre-Abe highs. And while Japan was still far from ‘turning the corner’ on the inflation front, the case could be made that they were in a significantly more handsome position than many other economies in the world.