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The yen: it’s all about the CA deficit

Nice spot from BoAML:

Many attribute the recent JPY weakness to the Liberal Democratic Party forcing the BoJ’s hand to potentially introduce large easing measures or even buying foreign assets. But the fundamental reason has been at play as well. Based on the BoJ’s trade-weighted index, the yen actually peaked in October 2012, right before the first deficit in adjusted CA was released on 8 November 2012.

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The trade balance typically starts worsening well before the currency depreciation as the strong currency was hurting the export competitiveness. As the currency turns, the trade balance continues to drop for another 12 months on average before it finally recovers.

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Such a J-curve effect was working in reverse during the 2008/09 financial crisis. Despite a sharp appreciation of the JPY (31% in six months from August 2008 to February 2099) the trade surplus quickly recovered to the pre-crisis level. The bounce from the bottom was more impressive in the face of a quick currency runup. The trade surplus bottomed in January 2009 (a deficit of JPY310bn), and it peaked in March 2010 at JPY877bn.

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—- IK