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(March 23, 2002) CURRENCIES: JAPANESE YEN--The yen had its biggest weekly decline against the dollar in three years as investors dumped Japanese stocks after the government said it won't implement new measures soon to pull the economy out of recession. Demand for yen fell as the Nikkei 225 stock average extended its slump to two weeks. The currency's declines erase about three- fourths of its gains this month, which were spurred by companies' repatriation of profits and government efforts to prop up share prices before the March 31 end of Japan's fiscal year. We've gotten back to reality again -- the Japanese economy is weak. The country depends on exports and will need a weak yen to make its products cheaper abroad and fuel growth.

Japan once again showed markets that it is a master of spin and short-term solutions, but little else. Therefore, it was fitting that quick-fix measures to save the Nikkei from short sellers had to be followed by verbal warnings against speculators who bought the yen in reaction to the Nikkei's rise. For that reason, the manic nature of USD/JPY in recent weeks has had little to do with fundamentals and more to do with fears and hopes in the run-up to fiscal year end on March 31.

Now, just two weeks after the yen's rapid rise forced many speculators to cover their short yen positions, the Nikkei's recent losses hint that foreign demand for Japanese shares is fading. Moreover, the yen was hurt by PM Koizumi's backing away from his primary reform pledge which was to limit JGB issuance to 30 trillion yen a year. This is a blow to Japan's reform efforts and could possibly lead to another downgrade in Japan's sovereign debt.

Therefore, since the recent yen rise was predominantly a speculative affair based on short-term measures to boost Japanese share prices, the yen is now experiencing a similarly rapid decline as temporary measures to support the Nikkei fade and speculators reassess the real risks associated with Japan.

The Bank of Japan said that the economy continued to deteriorate as a whole, "although the downward pressure from exports and inventories is gradually abating." Despite the bullish BoJ report, Japan is still suffering the same problems. Japanese investors are looking for an export -led recovery and an improvement in domestic demand.

However, the current decline should hold below 135 yen/dollar (.7500 $/Y for futures traders) ahead of April's bad bank loan disclosures and further anti-deflation measures as well as the lifting of deposit guarantees, which could lead to troubled banks repatriating assets to avoid insolvency.

As forecast in our newsletter dated 03-08, the June J-Yen dropped back to the down trend line. Now it is on its way to test the 0.9500 support for the fifth time. No reason to take chances: take profits on your shorts on the support and reinstate new short positions if the support is broken.

Jean-Jacques Chenier

www.alterama.com

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