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Japan’s Problem Is Bigger Than Yen
By Dian L. Chu, Economic Forecasts & Opinions
After much speculation and many flying rumors, Japanese government stepped in on Wednesday, Sep. 15 and intervened--sell yen, buy dollar--for the first time in six years. The yen had risen about 10% against the dollar this year, and just reached yet another new 15-year high against the US dollar, an eight-year high against the euro, on Tuesday, Sep. 14.
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| Graphic Source: FT.com |
In the context of a slowing economy, the rapid rise of yen is bad news as it hurts exports, stalls domestic consumptions, and further aggravates the existing macro problem (see graph). Toyota Motor Corp. estimates that every 1-yen climb versus the dollar saps 30 billion yen, or $351 million from earnings.
This also caught some traders and hedge funds off guard as few expected Prime Minister Naoto Kan would initiate such unilateral intervention. The surprise move propped up the dollar and Chinese yuan, while hosing down long yen ETFs (e.g., FXY was down about 3% in one day.)
Yen as Safe Haven
Sadly but truely, as dismal as Japan’s economic outlook seems, yen (along with Swiss Franc) is replacing the US dollar as the safe haven currency with the continuing unwind of risk trades. Investors see yen as “safe” due to the fact that Japan has a current account surplus and its government debt is mostly domestic instead of foreign.
Moreover, prospect of a slowing growth in the U.S. and talk of the Fed's continuing quantitative easing--driving interest rates even lower--further discourage dollar holding.
Generally, a country’s currency value rises with a healthy GDP growth, but in the case of Japan, it is quite the opposite. Despite Japan's ongoing current account surplus, a currency out of line with fundamentals could pose risks to its stability.
Global Race – Devalue to Prosperity
Some analysts are now worried about a possible global race of devalue-to-prosperity as other countries with appreciating currency may follow Japan’s lead.
Reuters reported that already Colombia's central bank said it was starting to buy at least $20 million daily to slow the rise in its peso currency, and Brazil indicated it wouldn't stand by if others weakened their currencies at Brazil's exporting expense.
Thailand, with its baht setting a series of 13-year highs against the dollar this month, is the next most likely to jump into intervention. The Philippines has also threatened as its peso hit a two year high against the dollar. Other Asian countries are also no strangers at the currency game, with South Korea and Taiwan among the most active.
Reversal of Fortune into Crisis?
In its Asian Development Outlook 2010 published this April, the Asian Development Bank (ADB) noted the speed and strength of the recovery in developing Asia, and low interest rates in developed countries, was prompting “huge” short-term capital inflows.
“…..In particular, the sudden reversal of short-term capital flows [as a result of intervention] could endanger financial and economic stability and bring about a currency and financial crisis.”
The good news is that so far, there is no immediate large scale reactions by other central bankers as most developing countries tend to focus more on the dollar exchange rate and thus are not yet too excited about yen’s movement.
Intervention Track Record – Not So Good
So, will this yen intervention work for Japan?
Typically, market factors and forces behind a currency appreciation that's out of sync with fundamentals are too strong to be countered by the act of currency intervention alone, and often with unintended consequences.
Swiss National Bank (SNB), for instance, started buying euro earlier this year trying to halt the rise of the Swiss franc. Well, Franc has continued to appreciate regardless, and hit an all-time high against the euro in July. Since then the SNB has been offloading euros, pushing Franc even higher against the euro. There is speculation that SNB could intervene again, but cue to the lesson learned not long ago, SNB should be more inclined looking to other instruments to tamper the Franc.
As for Japan's own track record, it is just as unimpressive. Its last intervention six years ago also failed to halt the yen's appreciation despite a 15-month Dollar shopping spree.
China in the Mix
Furthermore, unilateral intervention is not effective as a coordinated one with supports from other central banks. However, as it stands, don't expect United States, and Europe (or anyone else for that matter) act too kindly towards Japan’s solo act amid ongoing currency row with China.
Bigger Than Yen 
As for yen itself, the intervention succeeded as the currency fell 3%, the biggest one-day move against the dollar since the financial crisis. But the bigger question is whether this would achieve the ultimate goal--pushing export and domestic price levels high enough to help fight deflation--which has plagued the country for a decade.
Japan's intervention war chest is estimated at 2 trillion yen, and officials already said more action could be expected, suggesting Japanese authorities are in it for the long haul.
However, currency intervention along is unlikely the magic bullet for the fundamental and structural issues of Japan’s macro environment (see charts), which are still under intense debate among many experts and economists, and warrant an entirely separate discussion.
Dian L. Chu, Sep. 16, 2010
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jy proppin' up the usd, or 'what would the dollar have been worth at friday close?'
seems like site became pit for idiots who dont have a clue
# rapid rise of yen is bad news as it hurts exports, stalls domestic consumptions,
hey stupid ,, are u aware of fact that JAPAN import almost everything
that can be eaten, burnt etc. etc...
so STRONG YEN actually makes import cheaper, thus expands consumption...
cant believe, what an idiot..
alx
I wish the world was so simple, separated only by the knowing and the idiots. Your argument, unfortunately, is spurious.
The effect of cheaper externally sourced inputs into a product is a function of the percent of that import in the total cost of the good, as well as the degree of currency fluctuation. It is not a straight line equation. It may well be that the benefit of cheaper imports is exceeded by the increase in the FX value of domestic inputs such as labor, transport, etc., at least for exported goods. You can do the calcs yourself and see the sensitivity.
Thus, Japan might have to charge a higher price in external markets to achieve the same level of profit. Assuming some elasticity of demand, Japan would end up worse off, having either to accept less profit, or else lay off workers, both of which decrease Japan's domestic ability to consume.
For the purely domestic market, a drop in the cost of imported inputs would make the finished product cheaper, but is domestic demand dependent on price alone? For example, if salt gets cheaper, would anyone use more of it? Also, lower profits from exports, or else the effect of laid off workers (as Japan became price uncompetitive), might well impact domestic consumption.
It's not so cut and dry.
Doesn't a strong Yen reduce the cost of their imported raw materials? Doesn't this offset the loss on the exports? Am I missing something here?
@CEOoftheSOFA
exactly.... sorry pal 1st wrote,, then red u post...
you're #ucking right..
alx
As Marlene Dietrich said in A Touch of Evil, "your future(Japan) is all used up".
A long article about Japan that doesn't mention their demographic crisis--amazingly stupid.
isn't the rise of value a good thing?
http://covert2.wordpress.com
Japan's problems go beyond the Yen indeed.
Japan and China, as major holders of US debt, are both especially vulnerable to the global petrodollar ponzi racket.
As long as the Mideast can be dominated by US military bases and sheikhdom protectorates, dollar payments will be required to purchase oil.
By the back door method of raising oil prices (from about $30 a few years ago to about $80 now), the US devalues the worth of dollar holdings world-wide.
Of course, the US may print more fiat dollars to exchange for its own oil needs.
Let's not even consider the strong pressure for Japan to remilitarize which is coming from the US.
forgot to add:
"Of course, the US may print more fiat dollars to exchange for its own oil needs".
-or have the Saudis et al recycle the dollars back by "investing" in US treasuries etc.
and bubbles ever after....
Let just one little place, one Kuwait, one Abu Dhabi, begin to require payment for oil in gold.
Oh, what fun that would be.
They have been trading oil for gold since the 1940s.
Read up:
http://www.usagold.com/goldtrail/archives/another1.html
not even the goobermint like that. As Arlo Guthrie said "if we get three we've got ourselves a movement."
And it will happen.
Just give it time.
When George Soros manipulates currency markets in order to enrich himself, everyone cries foul. When a government does the exact same thing for the exact same reason, it's "economic policy" and no one seems to question the fundamental immorality of it.
Japan has significant unfunded liabilities and the largest debt of any major economy. At a blended interest cost of 1.4% on current borrowings; it absorbs 25% of Government revenues. In other words, if they were successful in creating inflation and the rate moved to 2.8%, interest would absorb 50% of government revenues and as you can see from above they are still adding debt at a rapid clip (almost 50% of current spending).
The fact that the debt is held in Japan is a disaster for the conservative Japanese people who have saved huge amounts and much of it is in banks and insurance companies that are large holders of Japnese bonds. Japan has about $20 Trillion of bank deposits; the United States about $8 Trillion. The government that has failed to fund future obligations has borrowed about $10 Trillion. The savings rate was 16% and now is zero because the young are not able to save and the old are forced to use their savings for retirement since interest income is generally less than a half of 1%. The two largest holders of Japanese debt are no longer net buyers, as inflow is down and retirees need money. Japan has not prefunded social security and medical care and they have a rapidly aging population.
Their debt problem is due primarily to a Keynesian approach to an economy over a sustained period of time. The entire approach has done one thing--destroyed wealth. Their stocks are down 70% and their real estate 50% to 70% over a twenty year period. Their government wasted the savings of an industrious and conservative people. Japan is on the radar for a sovereign debt crisis. A credit down grade or more European sovereign problems could cause a loss of confidence in Japanese bonds. Such an event would be a major blow to their banks and insurance companies. The government has borrowed all the money trying to accelerate their economy and it did not work. The result is the largest loss of wealth ever in the history of the world. They had a stock market bubble followed by a real estate bubble; we had real estate first and stocks second.
Well said, and with a solid understanding of priority. A return to normal interest cost will sink nearly every bank, sovereign, and sewer district. Like many toxic drugs, getting off ZIRP will prove more dangerous than using it.
+1
ZIRP is a trap. A rise in rates would sink housing further, and a deflation of the current asset bubble would end the financial system as we know it. It will happen anyway, we've been painted into a corner...
Oh, and nice weekly close on the PM's. Go Silver!
"They [Japan] had a stock market bubble followed by a real estate bubble; we had real estate first and stocks second." Wait, did I miss something? What was that dotcom boom in the late 1990s?
If anything, we had a stock market bubble, a housing bubble and another stock market bubble.
We are the living, breathing definition of bubblelicious.
Japan is a slowly dying country, economically and demographically. Japan also has 200 % of debt to GDP. If these three things were properly factored in the yen would go to zero. Since all investing these days ignores fundamentals, we get this kind of garbage.
you have no idea poor vampire...but here's my attempt at some MonsterMash enlightenment: Wall Street is making the hilarious claim that "leverage is down" as it "understands it was very bad and bad is bad since it killed Lehman and even worse made people wonder if maybe we really were incomptetent" so instead of "ramping it up vis a vis Uncle Salami" it goes pedal to the metal with the Yen carry trade and buys every commodity in sight and some that aren't fully knowing that "we've got a financial Pearl Harbor for yer Yenkeister if you devalue..."excessively."" Needless to say relative to you and me well, "they're sorry" but "that ain't no thank you either" because "those 100 foot yachts are just shadow vessels for the toys."
So, the US prints more money and these fools go out and buy it up?
I can just hear someone at the Fed saying, "Hey Thailand you can't let Japan punk you like that. Here, buys some of these fresh-of-the-presses federal reserve notes to fight back."
No, the US prints more money, and they print more too, and the two fools trade paper.
Don't trade much forex. It's always being manipulated by someone, but the paradoxes in forex now are interesting. Why a strong yen?
Lousy demographics, endless debt, 21 years of no growth/no innovation. What could you possibly buy in Japan that would be a bargain? Oh yeah, and their fault lines make California look safe and stable.
Try this out. Of all the Asian bourses, Japan still has rule of law. When the whole damn world is in deflation/bugger thy neighbor mode, return of capital trumps return on capital. May be wrong, but I see no other excuse for this. Any thoughts? Have one of the harem wenches wake up Chindit. We need input and wit. It's the weekend;)
..."but the paradoxes in forex now are interesting. Why a strong yen?"...
maybe because the Euro represents about 25% as a global reserve currency, and now Euro is no more perceived as a good reserve currency, so, in order to diversify from the dollar, yen are bought
..."but the paradoxes in forex now are interesting. Why a strong yen?"...
maybe because the Euro represents about 25% as a global reserve currency, and now Euro is no more perceived as a good reserve currency, so, in order to diversify from the dollar, yen are being bought
..."but the paradoxes in forex now are interesting. Why a strong yen?"...
maybe because the Euro represents about 25% as a global reserve currency, and now Euro is no more perceived as a good reserve currency, so, in order to diversify from the dollar, yen are bought
"rule of law", eh?
Where did they get those yen they sold? Hmmm? Oh. Right. They printed them. Because they have a "law" that says they can.
You do me too much honor. I was not speaking of law in the sense of ultimate morality or even fair play. Simply pointing out that in Japan you have a fair chance of getting your cash out of the country instead of merely dumping it in. If you are still confused, ask anyone who has "invested" in the "third world."
Well, given that I have made more money in Nicaragua than any other place on the globe (including lots of other "third world" countries...) I would say.... that you don't know what you are talking about.