THE YEN IS NO LONGER SUCH A SAFE HAVEN
DIRECTOR OF CURRENCY RESEARCH, GFT
IF POLITICIANS in the West want to cheer themselves up all they have to do is look at the approval ratings of Yukio Hatayama. Less than 20 per cent of the electorate feels that Japan’s prime minister is doing a good job. Even Richard Nixon still had the trust and approval of 25 per cent of the American public at the height of the Watergate scandal. Hatayama’s troubles reached their apex on Sunday night when the Social Democratic Party – a small member of his coalition – resigned in protest over his failure to move an American military base off Okinawa.
Normally, such political manoeuvering is viewed with casual detachment by the market, but traders are becoming increasingly concerned about the vacuum of leadership in Japan. Hatayama faces parliamentary elections on 11 July and given the current discontent among the voters, the chances are high that he may lose his position of leadership.
When Hatayama first swept into power, up-ending more than 40 years of Liberal Party rule, investors held high hopes that he would be able to reform Japan’s sclerotic economy. However with deflationary pressures still as strong as when he first took office, he now faces the wrath of the voters as traders watch the political drama with unease.
Currency markets abhor political instability and the yen’s vaunted status as an instrument of safety could come under question if Japanese elections result in further confusion. The yen, which typically strengthens during times of risk aversion, actually weakened significantly on Monday despite the fact that equity markets were lower.
Until now, markets have blithely ignored Japan’s fiscal debt burden of 200 per cent of GDP. Since Japan generates massive capital surpluses and has always been able to finance its debts internally, credit markets have given it the benefit of doubt and bought the yen in times of stress. But with the global recovery losing momentum and Japan’s pool of savings dwindling in the face of ageing demographics, the yen may no longer be the safe harbour currency it once was, especially if political turmoil delays critical fiscal reform.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail [email protected].