Yen and the art of currency maintenance

Poor retail sales in the US came as a shock to investors pinning their hopes for a rebound on the American consumer. The dollar duly tumbled more than 1 per cent against the euro, helped by a further rise in European bond yields.

A weaker US economy hit the dollar across the foreign exchanges. But there are fashions in currency trading and the euro is currently the place to be seen. Against the rather passe yen, the dollar rose only half as much.

The yen has been comatose since the end of March, stuck in a range of not much more than Y1 either side of Y120 to the dollar. Since the start of the year it has moved a little more, but compared with the ructions in the euro and sterling it looks staid.

The calm descended as the world's attention moved elsewhere. The "macro tourists", fast-moving hedge funds that bet big on the early days of Abenomics in 2012-13 by crowding into bets on rising shares and a weaker currency, have long since moved on.

After the excitement of last year's recession and another surprise round of central bank money-printing that slammed the yen, the economy is in waiting mode.

This has been a good time for shareholders. Since the start of the year the currency is unchanged, but shares are up 14 per cent. Japan is the best-performing developed market when currency effects are stripped out.

The tight inverse link between the yen and Japanese shares that held for years seems to have been severed (see chart).

Investors have been attracted in part by the prospect of more domestic pension money heading for shares and partly by valuations lower than in Europe or the US. The prospect of improving corporate governance is also helping sentiment towards stocks - although there can be few investors left who are not aware of the efforts to improve the use of corporate cash in Japan.

One risk is that the yen snaps out of its zen moment. If the outlook for the US keeps deteriorating, the yen will strengthen further, which should be bad for shares. Such a reaction would surely prompt yet more monetary easing, though, weakening the yen and helping shares. No wonder the currency has gone nowhere.

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