Please do not get too excited ... 240 is pretty low compared to historic figures.

There are only two numbers that will drive the exchange rates there, that is inflation ! On both, the UK and the Japanese side.

Look, we are in mit January already and inflation in Japan did not pick up ! We must wait and see IF the Japanese spend their bonuses that they received due to a very good business year in their home country or if they continue to spend their money abroad ( Internet Sales, Duty Free Shops ) and so on.

Money must flow back into Japan over three ways.

No. 1 The usual FDIs: It does not look too bright there. Foreigners tend not to invest in Japanese industry nor in government debt nor in stocks this year --- We might see this change over Q 3 and 4 as eventually emerging markets citing that region p.e. China, India and Indonesia go into a moderate slowdown --- we then will see some free money to spend and Japan might be a target market there.

No. 2 Consumer spending: Consumers do not buy in the domestic market, they buy abroad since they expect prices to decline further and most importantly they feel that prices in Japan are exorbitantly high. Price levels must come down further p.e. through tax cuts, discounts on the retailer side or higher wages. All three things do not seem too realistic at the moment. Kobe is so tied up in Koizumis old way that he do not seem to be able to break free.

No. 3 Fiscal policy in Japan is closely related to the Japanes Government. Japan at the moment buys USD T Bills ( they now have roughly 800b USD reserves. This keeps the yen down against the Dollar and spurs the carry trade. The BoJ can not hike endlessly since the government must pay of the debt. So this No. 3 being the most important and most unlikely will allow the Yen to depreciate even more. Carry traders jump in until some major points change ... after that ... well it is going to be a fast way down.

And ... do not forget about the yuen, there is a correlation between those two.

Have fun !!


/Smooth