Yen Repatriation

The recent rise in the price of the Yen has been largely blamed on Yen repatriation by Japanese companies bringing assets back home to deal with the costs of the terrible earthquake and tsunami. As Japanese insurance companies engaged in Yen repatriation to cover expected the costs of insurance benefits, G7 ministers and central bankers announced their intention to keep the Yen from going too high. In order to maintain orderly foreign exchange markets these agencies announced the intention of currency market intervention. As is often the case the mere threat of invention often turns the Forex market. Although Yen repatriation certainly continues it appears to be happening without driving the Yen to further highs. How to trade Forex successfully depends upon understanding what drives currency prices. Thus, a little insight into Yen repatriation is in order. What is happening is that much of the Yen carry trade has been done by Japanese unwilling to put their money in Japanese bank accounts where interest rates are nil. Thus these folks have bought US treasuries or other foreign debt instruments in order to gain a higher rate of interest. Now, when they need to bring assets home these investors need to sell offshore assets and convert their dollars, Euros, Swiss francs, and British pounds back into Yen. The buying pressure on the Yen has driven the price up.

The problem for Japan with a higher priced Yen is that Japan is an export driven economy. If the Yen is expensive so are Japanese products. High priced Japanese products could make them less competitive with similar products made in other countries. Thus Japan’s economy would suffer from a stronger Yen. Also, for those trying to bring assets back home, a stronger Yen makes their offshore assets less valuable. This has always been the risk of the Yen carry trade. So long as currency rates remain reasonably stable it is easy to bring assets back home to Japan. When the Yen raises greatly in value the investor may lose more money in the exchange rate change than he has gained in several years of holding offshore debt instruments. How to trade Forex today with the Yen versus any other currency is to be aware of the issue of Yen repatriation.

There are, as always, other factors other than Yen repatriation that drive the currency markets today. One is outright war in Libya as well as political unrest in several countries in North Africa and the Middle East. These events tend to drive investors to safe haven currencies. We typically see the dollar as a safe haven currency along with the Yen and Swiss franc. The problem for the dollar today is that much of the Yen repatriation or Japanese asset repatriation is coming out of T Bills and the US dollar. As such the dollar may fall in value even as some investors move to it as a safe haven. As usual we are not suggesting that Forex traders buy or sell Yen, dollars, or any other currency. The point of this discussion is to highlight the factors that tend to drive currency prices and to encourage readers to understand the fundamentals of the currencies that they trade and the technical factors that drive market sentiment.