You have not heard as many arguments for the case of deflation gathering much more steam since commodities have gone back up in price.  The only real nation with deflation on a currency-adjusted basis for the rest of the world has been Japan.  If you have followed the exchange rates in the Yen/USD of late, The Yen is at a high not seen in about 15 years.  If you consider the economies, this is starting to feel like a currency bubble is forming in the Yen.  There is an angle for the CurrencyShares Japanese Yen Trust (NYSE: FXY), but using currency solely for the iShares MSCI Japan Index (NYSE: EWJ) is misleading.

The big issue here is the FOMC meeting in the United States on Tuesday.  The expectation is that after the softening of the growth numbers there will be more accommodating comments out of the Fed that suggest quantitative easing.  Ben Bernanke can’t cut rates lower because where can you take Fed Funds when they are at the 0.005 to 0.25% target (14 bps)?  He can begin buying debt securities again and could make adjustments to the Discount Rate as a reversal of the prior move higher, but that would be increasing the money supply and the discount rate won’t have an economic boost impact.  Any of there notions is what the Yen is signaling.  Japan has had near-zero rates for as long as memory serves.  The U.S. has near-zero rates today, and many have argued that these were kept this low artificially and for too long.

Japan’s current account surplus was down as a result of the overseas bond yields slide, and Japan’s finance minister pledged to closely monitor moves in forex.  In short, Japan knows that if the Yen strengthens too much that it cannot afford to export to the U.S. (and therefor to China) because the currency premium makes the local goods for export more expensive than in other markets.

The Yen/Dollar is trading up +0.44 (+0.52%) at 85.85. Before today’s rally, the U.S. Dollar was roughly at a 15-year low against the Yen.

INO noted right before NOON EST today on its chart analysis: “Chart continues negative longer term. Look for this market to remain weak. Strong Downtrend with money management stops. A triangle indicates the presence of a very strong trend that is being driven by strong forces and insiders.”

The iShares MSCI Japan Index (NYSE: EWJ) tracks the MSCI Japan Index and invests in securities of the underlying index and in ADRs based on the securities in the underlying index.  Because this is tied to stocks, it is not at highs.  The $9.85 price today compares to a 52-week range of $9.15 to $10.71.  This one is very old as a former “WEBS” ETF and it is in the middle of a long-term trading band.

CurrencyShares Japanese Yen Trust (NYSE: FXY) has only traded since early 2007, but it hit an all-time high on Friday as this is the ETF that traders would buy to bet on the strength of the Japanese Yen.  This just hit an all-time high of $116.48 on Friday.  The ETF is now already more than $1.00 under this high.

24/7 Wall Street is not about catching the absolute last dollar or penny in a move.  Currencies have long-term trading bands.  Admittedly, there are always exceptions to those trading bands.  At the time that super-models were wanting to get paid in ‘non-Dollars’ and when the Europeans were coming to America just to shop, there was a huge opportunity building up in the US Dollar for those with patience and enough foresight to build up positions.  The dollar rally against the Euro was refuted by many until the $1.50/EURO move had gone under $1.30.  That went as low as $1.20, and now the exchange rate is back above $1.30 around $1.322.

The move from the Yen in 2010 has felt as rapid when you consider that the Yen did not almost double in value against the Dollar as the Euro did from peak to trough.

Maybe the bet on Japan is the right bet.  Maybe not.  Getting the right level for an entry in currencies is often guesswork.  Pure chartists can go back in time and point out where on the charts that you should have jumped in on.  Catching the bottom or peak on a live basis is something that few can do with accuracy.  Looking at MACD and stochastics are common tools.  On this we looked at it on the CurrencyShares Japanese Yen Trust (NYSE: FXY).  Both are at levels where the Yen has made sharp reversals in the past.  Arguably, the news or the ‘why’ were not seen for some time.

Japan could see its Yen strengthen further.  This could also be the level where the charts are already oversold on the Dollar or overbought on the Yen.  How many times have investors bet against the U.S. in the last two decades?  And how much have things changed in Japan on a relative basis?

It was not even a couple months ago that many savvy investors were looking for ways to bet that Japan would be the first of the big developed nations to implode under its debt.  Even in The New Normal of low growth and low incentives in the U.S., there may be a bubble forming in the Yen.

JON C. OGG

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