Land of the rising then falling yen

Japan's long sclerotic economy has been in the news of late, with signs of life emerging following the adoption of heavy quantitative easing and public spending by Prime Minister Shinzo Abe.

This monthly chart, by Alan Clement, a member of the Australian Technical Analysts Association, measures the yen against a basket of its trading partners' currencies. The yen hit a low of 69 in 1998, then spent 10 years consolidating in an ascending triangle pattern. Such long consolidations usually end in strong breakouts, which was the case here.

In 2008, the yen broke through a resistance level at 99 that was established by highs in 1999 and 2000, then fell back again and broke through strongly in 2009. The breakout sparked a high-velocity up trend that saw the yen pushed to a record closing level at 132.6 early in 2012. That represented a 60 per cent increase from the 2007 low of 82, which marks the bottom of the rising channel.

The index reached its highs last year after the government stepped up its stimulus measures. Then the market fell away, rising to make a lower high in September 2012, creating the right shoulder in a classic head-and-shoulders pattern- a strongly bearish signal.

The yen then breached its support line and plunged quickly, seemingly driven by the Bank of Japan's actions to massively boost quantitative easing. The fall stopped at the old resistance level of 99, which became a support.

From a technical perspective, the yen is now in a primary downtrend, Clement says. However, given the speed and size of its recent fall, we could expect to see further consolidation and even a rally to regain some lost ground. Longer-term, the downtrend is likely to give way to consolidation if the currency stays above the 99 mark. The weakening yen has been a factor driving the US dollar up, which, in turn, has helped push down the Australian dollar. Investors can gain exposure to the yen through futures, exchange-traded funds, contracts for difference and the foreign-exchange markets directly.

This column is not investment advice. rodmyr@gmail.com

Quantifying the easing