The Yen-Inspired ‘Flash-Crash’ Is an Ugly Omen

(Bloomberg Opinion) -- The sharp appreciation of the yen in the twilight zone between U.S. and Asia trading days isn’t just an overreaction to poor results from Apple Inc. in thin trading (Japan doesn’t return from its New Year holiday until Friday). It is a portent of the struggles ahead for the country’s central bank in 2019. It’s going to be harder than ever to keep the currency from strengthening.

Two major obstacles have sprung up to thwart the Bank of Japan’s valiant attempts to weaken the yen: The U.S. Federal Reserve potentially ending its quarterly tightening cycle and the slowing Chinese economy. The latter was shown starkly by Apple’s lower revenue forecast.

A depreciating Chinese yuan and a dollar no longer propped up by rate hikes make the BoJ’s herculean effort to generate inflation and growth look almost futile. Barring intervention, on which Japan has a terrible record, it looks out of ammunition and ideas to get the currency under control and boost exports.

The Yen-Inspired ‘Flash-Crash’ Is an Ugly Omen

It’s the only major central bank that’s still pumping out quantitative easing, and 10-year Japanese government bond yields are back at zero. It’s hardly a compelling place to park money, yet still the yen refuses to buckle.

The depth of the currency’s liquidity, particularly in the Asian time-zones, is its Achilles’ heel as money floods in during times of panic. Ironically, its bond market has come to a shuddering halt because of a total lack of liquidity as the BoJ has hoovered up all the free float. But even with money virtually free, it’s having no impact on economic growth — or anything else, for that matter.

The big drop in the dollar/yen price from mid-December doesn’t look like running out of momentum yet. A test of last year’s March low of 104.74 looks a distinct possibility. Indeed, the BoJ will be having nightmares about a return to the calamitous 2016 lows of 100 versus the dollar. Yet its own levers aren’t working. Its fate rests in the hands of the Fed and the Chinese economy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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