Japan, under the regime of Abenomics, has had, let’s say, some issues. Some have been predictable, and they have occurred like clockwork, such as the soaring trade deficit or consumer spending squeezed by inflation, a consumption tax hike, and stagnating wages – inflation without compensation.
And then there’s a new wrinkle: Tokyo’s foreign exchange spot trading market. During the first half last year, when Abenomics was being imposed on the country and when the Bank of Japan began printing dizzying amounts of money to buy just about every Japanese Government Bond that wasn’t nailed down, turmoil tore into the JGB market. BOJ and government officials jawboned the markets to devalue the yen. As intended, investors, including foreign hedge funds, listened and furiously dumped their yen. And the yen swooned.
During that period, yen-dollar trading hit an average of $14.8 billion per day. A record in the Bank of Japan’s data series going back to 1980.
But this year, the pendulum has swung back – to 1995.
The volume of interbank spot trading during the January through June period in Tokyo, compared to the same period last year, plunged 46% to an average of $8 billion per day. The lowest level in 19 years!
Forex margin transactions by individuals – such as the infamous Japanese housewife gambling away the family budget to supplement, so to speak, her husband’s stagnating income – plunged 30%.
In July, through the end of last week, trading languished at a rate of $5.6 billion per day, the Nikkei reported. Unless a miracle happened over the last few days, it will be the lowest volume since the $4.7 billion average of December 1995.
It seems, speculators lost interest in the yen. The BOJ has not announced an increase of its money-printing scheme. The yen’s exchange rate has been stable in the 101-102 range, and the fun has moved to other shores.
The BOJ’s Financial Market Department head, Yasushi Sugayama, had his own explanation. The presence of hedge funds in the Tokyo market was simply shrinking, he said according to the Nikkei. Instead they set up their main offices in Western countries or Singapore.
Whatever. Fact is it’s hard to make any money in trading when there isn’t enough price volatility to capitalize on. A godsend for Japanese exporters whose business become more predictable, less risky, and more profitable when the yen is low but stable.
But what if the selling re-starts, triggered perhaps by some economic data that traders suddenly take seriously, after ignoring it for months? It might be a BOJ announcement of more money-printing than currently expected. Or a joint BOJ-government strategy to push the yen down another 20%, as they did in 2013, now that the market would be ready for the next step. Then hedge funds and traders and housewives would start dumping yen into a market with no volume and no buyers.
Volatility will soar. And hopefully, the airbags will deploy to cushion the hit for Japanese consumers whose wealth and income the falling yen would eat into.
Rising exports and trade surpluses have always been vital to Japan. And reconstituting them is a cornerstone of Abenomics. But that plan has totally gone to heck. Read…. The Flame-Out Of Abenomics, in One Crucial Chart
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.