The Yen And Japan’s Fast Start to The Year


Japan’s economy has had an active start to 2013. Its main stock index, the Nikkei, is up 28 percent since mid-November , and its currency is trading at its lowest value in years. The latter is largely the effect of a bond buying program from the Bank of Japan set in motion by new prime minister Shinzo Abe. The Financial Times this week explained why “Abenomics” is working, and successfully meeting a goal to weaken the yen:

He has launched one of the largest pump-priming exercises in a history chock-full of them, a Y13.1tn supplemental budget, and browbeat the Bank of Japan into setting a 2 per cent inflation target.

The resulting market interest in the yen can be seen in U.S. dollar/yen options on futures. This week saw record open interest in CME Group USD/JPY options for three consecutive days, topping out just shy of 190,000 open contracts on January 30. Volume in JPY options also soared this month:



 CME Group open interest and average daily volume for JPY. Open interest (red), volume (blue)


CME Group chief economist Blu Putnam wrote of the market reaction earlier this month:

Market participants clearly believe the new Prime  Minister and his Finance Minister can convince reluctant technocrats within the Bank of Japan (BoJ) and the Ministry of Finance (MoF) to go along with the implied quantitative easing and foreign intervention needed to promote a weaker yen. It helps that the new Prime Minister will also get to appoint a new head of the BoJ in the spring. From an historical or chartist perspective, in developing scenarios of possible yen moves, one probably should consider yen depreciation taking the exchange rate above 120 per dollar (where it last traded in July 2007), perhaps to 130 (April 2002) or even 140 (August 1998).

The yen seems primed for continued activity and will be a currency to watch this year, especially  as “Abenomics”  continues.

Update: On January 31, 2013, open interest in JPY/USD options set a new record for a fourth consecutive day with more than 191,000 open contracts.

Will Patrick is executive director of FX products at CME Group.

Additional Recent Articles in News