[Market Anomaly] Why is there Yen buying in risk-off?
Hello, this is Shimozaka.
Around September already, and lately
for many individual investors
the market environment seems to be harsh.
According to the Nikkei newspaper,
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when examining the number of stocks whose prices doubled in a year,
it is now only 0.5% of all listed stocks
that remain.
The share is at a low not seen for about 10 years
(2019/8/22 15:20 Nihon Keizai Shimbun Electronic Edition
https://www.nikkei.com/article/DGXMZO48855460S9A820C1000000/ )
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as they say.
For many individual traders,the market environment is tough.
Having a 5-in-1000 ratio is hardly a treasure stock scenario.
But,what I think is
that even in such difficult times
only those who can win are the real ones.
“I can’t win because the market environment is bad.”
That’s just an excuse.
If you are a true trader,in any market environment
throughout the year
you must achieve a consistently positive return.
If you cannot do that,there is no point in trading.
“If the market environment were favorable, I’d make money.”
If you keep saying thatfrankly,
it would remain only a hobby.
Whether it’s a rising market or a falling market,at any time and under any circumstances,
you must continuously achieve a certain level of profit,
and if you can’t, you have no right to call yourself a trader.
Also,as I always think,
many people try to hunt for treasure stocks and win,
but how is that different from gambling?
Going to a casinoand playing roulette to strike it rich
fundamentally doesn’t seem different to me...
Whatever trading you dois your own freedom,
and while searching for treasure stocksyou may thoroughly manage risk
and continually earn above a certain level of profit,
there may be people who do so,
but,if you calmly think about it
and cannot clearly explain the difference between your trading and gambling,
unfortunately, profit from stock trading on the current trend does not exist.
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Why is yen bought in risk-off?
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Individual stocks are lackluster,the Nikkei Average is lackluster,
and in the forex world toothe yen has been strengthening since the start of this year.
And during yen appreciation,the usual question is
“risk-off yen buying is strengthening...”
such news.
There is also the term
“safe-haven yen buy.”But this term
isn’t it strange?
“Is the Japanese yen really that safe?”
Many would feel that.
It is well known that Japan carries a large debt..
If you look at Japan’s debt to GDP ratioit is
about 236%,the worst among developed countries.
(References:
http://www.zaisei.mof.go.jp/pdf/04-k02.pdf ）
In normal terms,it is strange that a country with this much debt’s currency is
considered safe.
At times,it is said that there is a possibility of fiscal ruin,
so why would the currency of Japan be bought in times of crisis?
Please think a little.
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Countries that have defaulted in the past
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The economy is
like a living thing,
and many factorsare intricately intertwined
and move in a complex way.
Just as human behavior cannot be explained 100% scientifically
with absolute evidence,
economic phenomena alsocannot be explained with 100% certainty.
“Why do yen buy in times of crisis?”
Even for this single question,there are various answers,
and it is difficult to derive an absolute answer, but...
I will introduce one useful idea.
↓
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Of course, individuals and private corporations cannot issue currency,so they must earn income and
pay back their debts from it.
However, governments that can issue currency
do not have to.
Therefore, government bonds denominated in the domestic currency
cannot become defaultable.
Takeshi Nakano
‘The Shocking Economics Class That Will Open Your Eyes [Basics]’
(Bestseller Co., Ltd.)
April 30, 2019 first edition, first printing
P.142
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The true face of Japan’s debt is yen-denominated government bonds.
The Japanese yen is a hard currency,
in other words an “international settlement currency,”
debt-reliable currency.
Therefore,
there is no need to borrow in foreign currency, but since it is not foreign currency-denominated
you could, if necessary, issue more yen and
use it to repay the debt.
That is whythere is no worry of Japan’s collapse,
as this line of thinking goes.
And indeed, in the past, countries that defaulted
had debt denominated in foreign currencies,
not in their own currencies.
↓
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Of course,countries like Argentina have defaulted.
However, that was
a default related to foreign-currency-denominated debt.
〔omitted〕
Following the 2008 global financial crisis,
Greece and Italy fell into fiscal crisis.
That happened because these countrieswere not issuing in their own currency,
they were euro-denominated,
Takeshi Nakano
'The Shocking Economics Class That Will Open Your Eyes [Basics]'
(Bestseller Co., Ltd.)
April 30, 2019, first edition, first printing
P.143
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Argentina, at the end of 2001,
stopped paying foreign debt,
declaring that “we cannot repay the debt.”
Also, in 2014it lost a court case with creditors who did not agree to the 2001 debt restructuring,
and defaulted again.
Greece also defaulted in 2012.In 2012 February,
the government agreed with bondholders to reduce the debt,
and default occurred.
And both Argentina and Greece had debts denominated in their own currencies at the time they defaulted?
No, their debts were denominated in foreign currencies.
If, in contrast, Greece and Argentina had debts in their own currencies,
how would it have been different?
The situation would have been different.
Because they could issue money domestically and repay the debts.
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Does Japan can borrow endlessly?
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“But if you say that, does Japan mean it can borrow endlessly?
There is no such convenient story, is there?”
you might think.
Of course there are limits.
If the government issues currency without limit,
the value of the yen would crash,hyperinflation would occur,
people’s lives would collapse, and default could happen.
However,with the Bank of Japan’s 2% inflation target
never being reached for a long time now,there is hardly any worry about inflation.
Therefore,even if the government needed to borrow and
issue currency to repay debt,it could be considered not a problem in this situation.
In that sense,Japan, despite its huge debt,
the yen is regarded as a safe asset.
As I’ve explained,
both markets and economiesare like living things.
They are formed by a complex interweaving of various elements,
and cannot be fully understood in a perfect, all-encompassing way.
In a world where improbable things can occur,
the economy can surprise us.
With that in mind,
I hope you will find the discussion today helpful.
So please enjoy today as well, until the end.
Keizo Shimoyama
