The Japanese Yen

¥

Micah Brock, Michael Derocher, Ryan Early, Annie McDonough &

Matt Warchol

The Birth of the Yen

• Yen created by Meiji Government in 1871 under the New Currency Act– Adoption of:

• Western style of currency

• Silver standard

• Decimal accounting system

Adoption of Paper Money & the Gold Standard

• Coins Law of 1897– Stipulated that 0.75 grams of gold was equal to 1 yen– Gold-convertible bank notes (a.k.a. paper money)

also introduced by the Bank of Japan

Fundamental Changes

• In 1931, following the example of European countries, Japan stopped the export of gold and suspended the convertibility of its banknotes

• In 1942, the Bank of Japan law permanently ended the convertibility of its notes, marking a monumental shift from the gold standard to the managed currency system

The Yen Today

• Japan remains on a managed currency system

• Floating exchange rates– Increased volatility in the market

The Yen Today: The Dollar vs. The Yen

• While all other major world currencies have been appreciating against the dollar, the yen has been depreciating

• Depreciation attributable to reported monetary contractions for three straight quarters in the Japanese economy with no reported expansionary policies in future

The Yen in the Future

• The Yen has faced serious pressure in the past few months due to a weak Japanese economy and cross-selling pressure from other currencies with higher yields

• However, net short positions on the yen are currently at an 11 month low

Technical Analysis

Yen Depreciation

100.00

101.00

102.00

103.00

104.00

105.00

106.00

107.00

Date

Series1

Technical Analysis

Yen Depreciation

100.00

101.00

102.00

103.00

104.00

105.00

106.00

107.00

Date

Series1

Technical AnalysisUSD/JPY

99.00

100.00

101.00

102.00

103.00

104.00

105.00

106.00

107.00

108.00

Series1

Fundamental Analysis

United StatesEconomic Growth 4.7%

Money Growth 4.9%

Inflation 2.3%

Interest Rates 1.26%

Trade Balance -$75.2B

(with Japan)

Japan2.6%

3.9%

-0.3%

0.1%

+$75.2B

Market Expectations

• Current USD/JPY exchange rate:

0.009483¥/$

• 12-month USD/JPY forward rate

0.009782¥/$

Our long-term recommendation:

Buy the dollar. Sell the yen, it is garbage.