Will Abenomics fail? and what will happen to Yen as a safe haven currency? These questions still haunt USD/JPY trading today.

Abenomics, Prime Minister Shinzo Abe's plan to boost Japan economy, is nearing its first birthday this month. Since the beginning, there's been controversion among analysts and economists in Japan and abroad, whether this strategy will work or not. The many arguments asked, will Abenomics fail? and what will happen to Yen as a safe haven currency? These questions still haunt USD/JPY trading today.

Before analyzing the impact of Abenomics on Yen, we have to look back at its real purpose. Abenomics is Japanese Government reaction to the rising economics problem which culminates in the decreased real GDP back in 2008. For a country as big as Japan, this is a bad omen. That's why, PM Shinzo Abe introduced a string of policy aimed to jolt growth. The policies are made on the assumption that economic growth could be reached through high export, low unemployment, and increases on domestic investment. Some of the strategies are targeting 2% inflation per annum, negative interest rate, bonds buying by the BoJ, and correcting Yen's overly high exchange rate.

Abenomics

Note the last point: correcting Yen's overly high exchange rate. For years, yen is known as the currency with the highest exchange rate. Indonesian may complain on Rupiah's downslide these days, but having a currency with overly high exchange rate is not good too. One reason is that because of it, Japan's goods became too expansive and can't compete with another country's (especially China). Government policy on currency, usually aims to stabilize its value, not ramping it up or drastically lowering it. And that's what Shinzo Abe wants; for yen to reach a certain rate where it won't hamper export, but neither it is too low.

The problem is, there's a contradiction here. All this time, yen is being thought of as a safe haven currency, that is a strong and reliable currency which could be used to save value in uncertain economic climate and where investors could runaway to when another currencies suffer high volatility. Let's say Abenomics successfully revives Japan; export rises, unemployment decreases, and domestic investment reaches new high. What will happen then? of course, the market's confidence on yen will follow behind and its value is going to again. This, in turn will put Japan back on the start line.

Looking back to Japan economic reports this year, that's what happened. Yen decline sharply at the star of the year due to market uncertainty over Abenomics, but it went back up every time better report came out. One example is yesterday's machinery orders report which shows pretty high increases than last year. The report, along with rising uncertainties over the Fed's Tapering, helped sustain Yen against USD.

The conclusion is, controversies about whether Abenomics will be successful or not and what will happen to Yen will continue unanswered. Regardless, one thing that's undeniable is Abe's commitment to carry out all of his plans. Long term investors responds well, proven by increases on foreign investment in Tokyo Stock Exchange. Bloomberg last afternoon reported that since Abe held PM position, yen has lowered 23% against dollar, and TOPIX successfully increased 55%.

But forex traders are still in the 'wait and see' period. We can't say for sure that yen has reached new equilibrium. There's still many things in Abe's book that's not yet done. Japan too, is still unsatisfied by its 'soft' economic reports. The Governor of BoJ even said that they are prepared to move agressively if needed. For the time being, it seems USD/JPY rally will go on.