Neils Christensen

The worst natural disaster to hit Japan since the second world war is surprisingly having little impact on the country’s currency.

In the last few days the Nikkei has plunged sharply lower; however the risk aversion in the marketplace is helping to support the Japanese yen in the near term. On Tuesday, March 15 USD/JPY dropped a low of 80.6080, which was its lowest point since November 2010.

Some currency strategists are expecting to see the yen push higher in the near term. According to a recent article by Reuters, investors and companies are starting to exit their investments and repatriating their currencies.

Because of the devastation, there is a lot of confusion in the global currency market and currency strategists are mixed as the yen’s pricing in the medium term. Currency strategists at Scotia Capital are expecting to see long-term weakness in the yen, but admit that there should be a lot of short-term volatility.

Working in favor of JPY are repatriation flows from both Japanese corporates and insurance companies who need to fund claims as well as general flows that are associated with risk aversion. “Working against JPY are foreign investors who are shedding Japanese exposure,” said chief currency strategist Camilla Sutton.

Currency analysts at the Bank of New York Mellon said that any major weakness in USD/JPY should attract some buyers in the medium term.

“With a line in the sand for USD/JPY drawn at 80.00, speculators will be weary of chasing the pair lower,” said Michael Woolfolk, senior currency strategist at Bank of New York Mellon. “A 15 big figure move lower in USD/JPY would be deemed politically unacceptable and entirely avoidable.”

Currency strategists at Citigbank are relatively neutral on USD/JYP in the near-term. They are expecting long-term support to hold at 80.20 and could test 84.00 within the next three months.

The crisis in Japan continues to spiral out of control since it was hit with a magnitude 9.0 earthquake on March 11 and major tsunami. In the last few days radiation has slowly increased and is reaching critical levels.

On March 15 the government order 140,000 Fukushima region to seal themselves indoors as nuclear power plants continue to lead radiation into the environment. If workers are unable to cool down the exposed core, the government could be forced with large scale evacuations.

According to the government the death toll from this crisis could rise as high as 10,000 people.

Postscript:

Between the time of this original post on March 18, 2011 and today, the yen has dropped to the .76 range.