Is Yen Reversal a Concern?

After five years of deliberate depreciation of the Japanese yen by the central bank, the yen has begun to appreciate—and rapidly. The first chart below shows the movement in the yen, which has moved in fits and starts. Note that an upward movement on the chart actually represents a depreciation of the yen relative to the dollar. The yen is now at a level not seen since October 2014.

There are several implications of a strong yen. First is the market’s repudiation of the current Bank of Japan policy. The Japanese market tends to be very sensitive to its currency, as both Japan’s economy and market are heavily weighted to exports and export-oriented companies.

The other major implication for a strong yen is that it suggests a weak global economy. Global banks and private investors have engaged in the “carry trade”—borrowing money at Japan’s very low interest rates and investing in higher-yielding assets elsewhere. When they determine that these investments are relatively unattractive, they tend to sell those assets and move money back to Japan, boosting the value of the yen.

We can see the impact of this pattern by looking at the correlation of the yen and the S&P 500. The second chart shows this relationship, which is generally positive. When the yen has been weak, U.S. stocks tend to rally, while a strengthening yen shows a mild negative. The recent yen strength has not negatively impacted the S&P 500, but this has not been the typical pattern. We look to yen strength as one indicator of global weakness.

Relationship of Japanese Yen to U.S. Stocks

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Source: LPL Research, Bloomberg 04/08/16

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