On Dichotomy Of Japan Currency And Market In 2019

Saturday, May 11, 2019

yen

Study of Japan Currency and Market

In our recent article on “Forecast:  Roadmap for Mighty Dollar in 2019”, we forecast the fall of the US Dollar.  This has generated some interests and enquiries about other currencies.  This is beyond our capability to do.

Here we will analyze the Japanese Currency (YEN) and its relationship with its Stock Market (NIKK).  We noted that there is a dichotomy between them, unlike the US Dollar with its stock market.  Again, we will use the technical analysis, including our specialized Fourier cycle analysis.

Dichotomy of YEN and NIKK

Japan is third largest economy in the world.  Japan is democratic nation where the stock market is not controlled like China. In controlled society, the economic numbers are highly distorted and hence not subject to technical analysis.

Simple Observation

Chart 1 – Correlation of YEN and NIKK

The above chart showed:

  • The Currency YEN is negatively correlated with the Stock Market NIKK.
  • This behavior is unlike the positive correlation of USD with DOW.
  • One of the key reasons for this opposite behavior is the extremely low interest rate i.e. near zero for a long period that has led to the YEN carry trades.

Forecasts of YEN and NIKK

In the following two charts, we have applied our specialized Fourier cycle analysis to the Japan Currency (YEN) and its Stock Market (NIKK).  The time series data came from St. Louis Federal Reserve.

Chart 2 – Fourier Cycle Analysis of YEN

We observed that YEN will continue to rise, like the gold price.  The major cycle component is 8 years.

Chart 3 – Fourier Cycle Analysis of NIKK Stock Market

The above chart predicted that the Japan market Nikkei225 will go down slightly in the time period 2019-2022

Comparing Currency YEN with USD

Chart 4 – YEN and USD Negatively Correlated

There is a strong negative correlation between Japan currency (YEN) and US currency (USD).  That may portend competitive debasement of currencies in the future

Essence of YEN Carry Trade

When the interest rate is extremely rate and near zero as in Japan, this had led to the YEN carry trade which large international parties can make money almost with no risk. 

Summary

The dichotomy in the behavior of the Japanese YEN and the stock market NIKK is fundamentally caused by the YEN carry trade.  How long will this last?  We do not know as President Trump is trying hard to lower USD and US interest rate at the same time in the uncertain future.

“But man in his pomp will not endure; He is like the beasts that perish.”

Psalm 49:12

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F.T. Dao is a private investor and recently left the corporate world for technical analysis of stock markets.  He holds a PhD degree in physics and has done technical analysis of the market on the side for many years.  He welcomes constructive discussion and can be reached at:  ftdao245@gmail.com  ,ftdao245@comcast.net