Transactions + Store of Value = Money Strength.
Part of the reason the Yen is strong is due to it being the global funding (carry-trade) currency...see prior posting. So the reason to hold yen, is to buy risk assets (selling the yen making it weaker), this is the transaction aspect of the yen.
Also you don't want your money to lose value while holding it until the next transaction, this is the store of value aspect of money.
Inflation destroys the store of value, while a positive interest rate increases. A negative interest rate acts as inflation destroying store of value.
So with the yen at a neg. -.1% short term interest rate, value ought to be destroyed and the yen weaker? Right? Not so fast.
Inflation destroys value, but deflation increases value.
Running the numbers on Japan (using Trading Economics data) currently .1% interest +.3% deflation = .2% positive return.
If you crunch the numbers for the UK = .2%
Euro Zone = -.1%
USA = -.5%
Another huge aspect is the anticipated inflation often based on trade openness and political stability.
So whereas the pound has a higher relative rate of real return than the Euro or USD, the trade and political instability lead investors to question if the rate of inflation will remain low.
Hope this helped.
AI
