When currency markets close for the weekend this afternoon, the Japanese yen will have slid against the U.S. dollar for the last eight months in a row.
Since hitting a 2012 low of ¥77.12 to the dollar on September 13, the yen has devalued all the way to current levels around ¥101.00.
Because the Japanese government has not yet taken up structural programs in order to boost competitiveness and potential growth in the Japanese economy, the dollar-yen exchange rate has been the primary yardstick for the vaunted "Abenomics" program of fiscal and monetary stimulus that has been underway in Japan since December, when former Prime Minister Shinzo Abe was re-elected to office, six years after his resignation from the post in 2007.
Morgan Stanley Japan equity strategist Hajime Kitano says not to read too much into the yen's recent decline in terms of ushering in "structural change" to the Japanese economy.
In a note to clients, Kitano points out that long yen declines like this actually happen about every seven years:
Since the switch to the system of floating exchange rates in 1973, the dollar/yen rate has risen for at least seven consecutive months on six occasions including the present. It is a phenomenon that occurs once every seven years. We thus think it is too early to judge whether eight consecutive months of yen depreciation would reflect ‘structural change,’ as suggested by the Nikkei.
Exhibit 1 shows the average dollar/yen rate in the 12 months before and after the month when these record-duration phases of yen depreciation ended. After an approximately 6% decline over 5–6 months, the dollar/yen rate starts to rise again. This is of course only the average pattern, with the year following the end of record-duration phases seeing a further 13% rise for the 1996 occasion, and a 14% decline in the case of 1990. Indeed, it is only with the benefit of hindsight that we know when a record-setting phase of yen depreciation ends.
Here's Exhibit 1:
Bloomberg, Morgan Stanley Research
Aside from historical patterns, though, Kitano cites another reason to be skeptical: the relationship between yen-selling interventions by the Japanese government and the value of the currency.
The intervention in August and November 2011 had a total scale of ¥13.6 trillion," says Kitano. "We think that this certainly could have affected the dollar/yen rate after a lag."
The chart below shows the relationship between the 12-month average of yen-selling intervention value as a percentage of trade volume and the year-over-year change in the dollar-yen exchange rate.
Bloomberg, Morgan Stanley Research
"If this supposition is correct, then we think that it eliminates one justification for the structural argument that 'this time is different'," says Kitano. "Experience tells us that when the mass media bring up a 'structural argument,' it is advisable to doubt the market’s sustainability."
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