Yen For Dollar? or Godzilla?

Summary

Discussion of the potential impacts on equity, bond, commodity, capital and asset markets regarding the following.

Currency risks; transactional; portfolio and structural.

Yen short covering; yen/USD carry trade; dollar liquidity issues.

Effect on Japanese and Chinese exporters; carry demographics.

Godzilla, 1954 - The world is beset by the appearance of monstrous creatures, but one of them may be the only one who can save humanity. Producer Tomoyuki Tanaka stated that, "The theme of the film, from the beginning, was the terror of the bomb [atomic]. Mankind had created the bomb, and now nature was going to take revenge on mankind."

Above note JPY versus USD's steady ascent with yesterday's huge +3% post BOJ candle. Last night's +3 JPY/USD move, and a 14% move since June 8, 2015, have had an impact on Japan's banks, exporters and economy.

The Yen, which is now up 10% since February... that's very bad for Japan's export-based economy as the same $20,000 Toyota that put 240,000 Yen on TMs books in Feb is now putting 216,000 Yen in their pockets in April. They already made the car and shipped it 3 months ago and they paid their workers and parts suppliers in weaker Yen at the time so this change in currency essentially wipes out all of their profit on the car - that's why this matters so much - especially to a net exporter (and that goes for China too). - P

The example above speaks to currency risks which can affect the books (cash flow) in real terms, vis when currency changes are adjusted for differences in inflation. Long term, most currency fluctuations tend to be offset in real terms by price changes. In addition, hedging can be affected through futures, swaps, or options.

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