Akin Oyedele

The yen just broke.

In a note to clients on Tuesday, Societe Generale's Albert Edwards wrote that the Japanese yen finally broke a 30-year support level that will set off a new round of currency turmoil.

Last September, Edwards said the chart of the US dollar versus the yen was the most important chart for investors.

He also predicted that the yen would fall to 145 by the end of March.

That didn't happen, and Edwards acknowledged he was wrong to put a date to a forecast.

But the yen has in fact broken through 120 and is close to its weakest levels against the dollar in eight years.

And so since Edwards is right, at long last, here's what he says happens now:

Having finally crashed decisively through ¥122 last week (see chart below), what has changed since November? Two things — deflation fears in the west have ebbed away recently but the economic situation in China has become more precarious. Themost important thing as the yen sets off another round in the global currency war is that China is now in outright deflation and cannot tolerate renminbi appreciation. As the yen drags down other regional currencies, and the renminbi is forced to participate in a competitive devaluation, deflation fears will surely quickly reignite in the west.

Edwards writes that a key measure of deflation in China — the GDP deflator — is down 1.2% year-over-year.

And that's only part of the reason it may need to weaken its currency:

China may wish to keep the renminbi stable at this time ... [b]ut the economy is simply not in a position to withstand a major yen decline bringing down the currencies of its competitors in the region (and the additional deflationary impulse). I remain convinced that China must start guiding its currency down against the dollar and it can do that easily now it has a BoP deficit by doing absolutely nothing (ie not intervening any longer to hold it up)! China will also take the IMFs recent declaration that the renminbi is no longer undervalued as justification for these actions.

So there it is.

Here's the chart of the yen:

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