Guest Post: While All Eyes Are On Europe, Japan Circles A Black Hole

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

While all eyes are on the absurdist tragicomedy playing out in Europe, Japan is quietly circling a financial black hole as its export economy is destroyed by its strong currency and the global recession.

There is a terrible irony in export-dependent nations being viewed as "safe havens." Their safe haven status pushes their currencies higher, which then crushes their export sector, which then weakens their entire economy and stability, undermining the very factors that created their safe haven status.

As long as Germany stays within the Eurozone, Japan is the primary example of this dynamic. Should Germany leave the euro and return to its own currency, it too will begin orbiting the financial black hole of declining exports driven by a strengthening currency in a global recession.

Economies that are less reliant on exports are much less exposed to the consequences of a strengthening currency.

We can lay out the dynamic of Japan's currency and export-dependent economy thusly:

1. Export-dependent economies such as Japan, China and Germany rely on strong exports to sustain their employment and growth.

2. This means they must maintain positive current accounts (trade surpluses).

3. As their currencies strengthen, their exports become less competitive globally.

4. Export-dependent economies must pursue strategies to keep their currencies aligned with their buyers, the importing nations.

5. Germany has done so via the eurozone, which aligned its largest import market, Europe, with its own currency.

6. China has done so by pegging the renminbi (yuan) to the U.S. dollar and restricting foreign exchange (i.e. not allowing a free-floating renminbi).

7. Japan has neither of these advantages, and must intervene in the FX markets by buying and selling yen and dollars.

8. Despite its well-known debt problems (see chart below), Japan retains a massive and diverse industrial base, a current-account surplus (or modest deficit with its nuclear power plants largely offline) and large overseas assets.


9. These assets, plus its homogeneous culture, makes Japan an island of stability in an increasingly unstable global economy.

10. For these reasons, the yen is considered a "safe haven" currency and yen-denominated bonds as "safe haven" liquid investments.

11. As demand for yen rises, the currency strengthens, weakening the competitiveness of Japanese exports.

12. The "safe haven" status of the yen ends up hurting the Japanese economy's primary engine, exports.

13. The stronger yen ends up weakening the very attributes that make the yen and Japanese bonds "safe havens."

14. As the global economy slides into recession, exports decline sharply under the double-whammy of falling demand and a rising currency.

Ironic, to say the least. 

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Ahmeexnal's picture

Don't forget Australia!

JohnKozac's picture
Australian House Prices Fall for Fifth Straight Quarter




NSW, Victoria post biggest drop in house prices

engineertheeconomy's picture





Precious's picture

Point # 3 and #11 completely miss the plain fact that Japan imports almost 100% of its natural resources used in production, and therefore, the higher Yen means they pay much less for raw material used to produce their exports.  

But no matter. All you Kyle Bass fans out there go ahead.  Bet against Japan.  Two atom bombs.  A triple play Fukushima disaster.  Whatever.  Looks to me the only dent Japan suffered is when the fucked up US banking system collapsed.  Just like all of you, Japan had little choice in that epic fleecing.

It's probably because Japan has too much debt somewhere, somehow, by someone, or some other fucked up juvenile economic illogic. Fucking moronic chart here labeled Lost Decade with nothing "lost" in sight.

Furthermore, the majority of fucking points on this dip shit list are circular, redundant or just wrong.

But onward chartist turds -- because you've actually never made a fucking product and wouldn't know how anyway.

By the way "Hugh-Smith".  Why don't you make up your fucking mind, Hugh or Smith.  Which is it, you stupid parrot.

Tourist2008's picture

You´ve got some good points hidden away in the cursing-fest, why not let them come out and rant a little less?

Cognitive Dissonance's picture

Have no fear, UnderdogBen is here. What's a little money printing when the TBTF world is at risk of failure?

And so the fiat insanity marches steadily on unabated.


<Overheard in a Homeland Security Goldman Sachs executive washroom elevator>

"Someone's gotta put a muzzle on Charles Hugh-Smith. He's a threat to national security....not to mention my job."

casey13's picture

Europe, Japan and then the USA. The senior currency is always last but the US is no safe haven.

Cranios's picture

Isn't that what usually happens with markets? Great deals get bid up until they aren't great deals anymore. Nothing new or unusual here.

Stuck on Zero's picture

I think that in this case it's like 3000 people running around on the decks of a sinking cruise ship looking for a lifeboat that isn't too shabby. 


RhoneGSM's picture

I am thinking maybe more like Super Chicken

qussl3's picture

Japan is the world's largest net creditor.

They have a heck of alot of productive overseas assets.

As long as those income flows are repatriated and go into the debt markets, this disaster can continue to be a slow motion train wreck that lasts longer than your account can.

magpie's picture

Just think, if they had to repatriate their assets from Europe Draghi would get to jawbone once again !

LawsofPhysics's picture

"As long as those income flows are repatriated and go into the debt markets"


FAIL!!  Isn't happening and the new debt/servicing requirements are going exponential.  If Japan was the only net creditor in this position, then you might have a case, but they aren't.  The whole world is now Japan and the capital and resource mis-allocation and malinvestment is only getting worse.

Landrew's picture

I believe you are wrong, CHINA is now the world's largest CREDITOR nation two years running.

doc_in_the_house's picture

spx @ 1406 = yaaaaAAAWN!

shorted last fri @ 1392 and yesterday @ 1399 and some more @ 1406 = avg price 1401 = NOW RIDE.

EUR shorted last fri @ 1.237 and yesterday @ 1.2425..its now @ avg short price = 1.24

RIDE BABY RIDE...gimme spx sub 1100 and EUR sub 1.10

magpie's picture

Not going to happen so quick, they still have too many bonds to short.

crawldaddy's picture

and its still has an ongoing nuclear disaster nightmare, no matter what type of bullshit they try to cover it up with, its not going away.  

JohnKozac's picture

Soaring oil/gas prices are about to squelch any flicker of global "recovery." Since Japan imports most of its oil.....yips!



bigwavedave's picture

When the big reset comes I know where I would rather be. Katrina vs Fukushima

Meesohaawnee's picture still looking at 1410 - 1425 to nibble short. when a president is desperate. you know he wants "stocks at 4 year highs " on the 5 oclock news to calm the sheep as to how bad they are  getting fucked up the ass every day.. its hard to stay out of short cause you know its insane

jrt's picture

Not ironic... this is how the "system" is supposed to work.  During fixed exhange rates (Bretton Woods) foreign accounts cleared deficits by exchanging gold. The US was the first to "cheat" by refusing to clear deficits with France with gold (DeGaulle vs. Nixon).   Since then we've had numerous countries "cheating" especially China with pegs and exchange controls.  In other words WE DON'T HAVE an AGREED UPON GLOBAL MONETARY SYSTEM!   But markets will adjust one way or another.... despite the US Postal Service accepting SDR's as payment...

the grand plan remains a figmentation of the USA/IMF/WORLDBANK/BIS imagination....but they'll keep trying since there is no plan B.

SWCroaker's picture

In Engineering, and in Nature, there is a term for systems that have a harder time when they grow and an easier time when they shrink: Stable.

They're good.  Robust even.  You can leave them alone and not need to fiddle with stuff.  If success in exports leads to too much strength and a subsequent decline in exports, then that sort of seems cyclical, and sustainable.  Japan gets a gold star on that test question.

mick68's picture

Wrong. Factor in the debt based economy the whole world is on and understand that inflation is a requirement, not a luxury.
Any country standing still is falling behind, it's called Keynesian economics.

LawsofPhysics's picture

Please, wake up, energy (OIL), and to a lesser extent GOLD, are the reserve currency, always have been.  Think about it, if you have either, then you have something of real value to trade with.

madcows's picture

So, what you're saying is it's bad to have industry, b/c people buy your stuff, until they can't buy it, which makes your economy bad. 

I suppose, it's just better to have no industry, that sells no goods, b/c then you don't go bust... you're just bust all the time.

Spectactular, thanks for that insight... but my McEmployed nation seems to be sucking back teet right now, and some industrial production would be good for the unwashed masses.

Dr. Engali's picture

No what he is saying is that it's not good to be over concentrated in any one industry. The heavier the concentration the more unstable the economy is. The U.S economy is clearly unstable because it is too heavily weighted towards consumers and financials.

madcows's picture

No, there is no mention of industrial concentration, only "Export" centric economies.

So, if you're selling stuff, that's bad.  It's bad to be china.  It's bad to be india.  It's bad to be japan.

Please re-read the article. 

Dr. Engali's picture

Maybe you need to re-read the article. without focusing on one single dimension. Everything he states about Japan's economy is "export depended" or "primary engine exports". It doesn't say exports are bad it says the countries over dependence on exports makes it unstable as it's currency strenghtens, which happens to be the truth.

Observer's picture

Very flattering on India but Indian GDP is about 60% consumer driven. Exports and their gross impact account for about 10%, not exactly export centric is it?

madcows's picture

Ripped from the article above:

8. Despite its well-known debt problems (see chart below), Japan retains a massive and diverse industrial base, a current-account surplus (or modest deficit with its nuclear power plants largely offline) and large overseas assets.

I guess that means they don't just do engine parts.

Export's:  Japan's is only 13% of their GDP, so I guess they aren't export centric either, huh.

Nice mono-brow, though.

OpenThePodBayDoorHAL's picture

yes but if they can't even keep the lights on I'm not investing there. Jim WhatsHisName from Goldman said it "what the heck is wrong with you guys?"

Hedgetard55's picture

"Weakness is strength"

"Strength is weakness"

We have always been at war with EastAsia.

purplefrog's picture

Good post CHS!  I like your style.

Tsar Pointless's picture

Alright, then. If Europe going ove the cliff was good enough to get the S&P back over 1400, then will the detonation of Japan's ecomony be enough to get it back near/over 1500?

I was right with the 1400 call. I guess we'll see if I'm right when I say it will indeed get near/over 1500 again.

September 11 would be my drop-dead date. So to speak.

SoNH80's picture

Life in Japan was tough in 1612, and they survived and thrived anyway.  The Japanese are tough, hard-working, practical, law-abiding people with some of the best mechanical and electrical engineering minds on the planet Earth.  Their cities are clean, safe, and with up-to-the minute infrastructure.  Fukushima is a mess, but there's plenty of Cold War-era nuke contamination around Europe and the US, too.  I am not in the Japan-bashing camp.  Their tech keeps surprising the world-- like 90%+ efficient air-source electric heat pumps, that, for some reason, cannot be purchased in the U.S.A., aka OPEC's slave.

Totentänzerlied's picture

Couldn't have said it better. A country of comfy slaves in a postmodern hell, indeed.

Not Too Important's picture

They've found radioactive cesium in the Kelloggs' cereal in Japan:

And where there's cesium, there's uranium and plutonium.

Milk in Hawai'i radiated past 600% of EPA allowable limits:

Who drinks the most milk and eats the most cereal? Kids and old people.

The worldwide die-off through contaminated food has begun. Japan is first.

JohnKozac's picture

I didn't want to bring this up,  but since you started it:


California Slammed With Fukushima Radiation


Projected paths of the radioactive atmospheric plume emanating from the Fukushima reactors, best described as airborne particles or aerosols for 131I, 137Cs, and 35S, and subsequent atmospheric monitoring showed it coming in contact with the North American continent at California, with greatest exposure in central and southern California. Government monitoring sites in Anaheim (southern California) recorded peak airborne concentrations of 131I at 1.9 pCi m?3

Anaheim is where Disneyland is located.



KidHorn's picture

Japans problems can be traced back to the 1980's when their central bank decided it was a good idea to devalue their currency vs USD. If they had let their currency appreciate, it would have forced higher domestic consumption and more imports. In the short term, it would have been more painful, but the long term benefits would eventually outweigh it.

China is running into the same problems as Japan. They're just a decade behind them.

You can't continually trade products for coupons for future purchases (USD), At some point you have to use the coupons. If you wait too long, you end up with nothing to show for the exports.

otto skorzeny's picture

if all else fails their bukkake porn industry will stay strong

Precious's picture

at least as long as there is a good supply of Korean actresses and German pudwhackers ...

q99x2's picture

Rid the world of the slimey middle man. Let nations build their own wealth.

nothing can go wrogn's picture

Japan has been through much over the centuries. Wars, economic disruptions, tsunamis, monsoons and earthquakes. They are a resiliant people, and have always bounced back.

But then they signed a suicide pact with the devil, and lined their small island with 50+ nuclear power plants.

They say that the Fukushima radiation equivalent to 168 Hiroshimas. That is just one set of reactors among many. What will be the fate of the others? How damaged are they now? What will happen to their DNA over the next 10 to 20 years?

I think their economic problems are a sideshow compared to the nuclear nightmare they are facing.

Great video if you have not seen:

Frying Dutchman "humanERROR"

Not Too Important's picture

"They say that the Fukushima radiation equivalent to 168 Hiroshimas."

It's far worse than that - about 112 Hiroshima-sized nuclear bombs' worth of radiation being emitted every hour, every day, every year:

“A recent study was prepared for Greenpeace Germany by international nuclear safety expert Dr. Helmut Hirsch. Dr. Hirsch’s assessment, based on data published by the French government’s radiation protection agency (IRSN) and the Austrian government’s Central Institute for Meteorology and Geodynamics (ZAMG) found that the total amount of unstable radionuclides Iodine-131 and Caesium-137 released between March 11 and March 23 has been so high that the Fukushima crisis already equates to three INES 7 incidents.

Release of radiation from the stricken reactors has reached 10,000 teraBequerels (10,000 trillion Bequerels) per hour, measured for radioactive Iodine-131.”

“The uranium bomb which the United States dropped on Hiroshima at the end of World War II released 89 tera becquerels. It killed 140,000 people – many instantly, others within weeks of the blast as they succumbed to severe radiation burns.”

So, a rough estimate is that Fukushima is spewing the equivalent of 112 Hiroshima-type nuclear bombs worth of radiation every hour, of every day.

That’s 981,120 atomic bombs a year going off worth of radiation into our biosphere, and we're just about a year and a half in.

Quantum Nucleonics's picture

Japan is instructive to anyone who thinks that the bottom is going to drop out of the markets, economy, US Treasurys, and/or civilization as we know it.  Japan has been cruising along with negative real interest rates, deflation, and a demographics time bomb for most of the last two decades.  A seemingly unstable economy can remain functionally stable for far, far longer than people realize.  Short sellers of Euro assets take note.

Tommy Gunner's picture

When this thing goes down, and it will, there will be no safe havens.

JamesBond's picture

so china can destroy japan quickly simply by dumping all their cash into their bond market?



kkam's picture

The writer is rehashing the same arguments made by theoretical economist over the past 20 years, all expecting Japan to collapse in a heap. The 'lost decade' is a myth created by journalists and writers who like the sound bite. The only thing 'lost' were property prices and bank profits, both a healthy correction to the excesses of the 80s. The chart here shows that real GDP has more than doubled over the past 10 years and yet the writer says this is the lost decade? This despite formidable obstacles in this period such as the rise of China, the US-sourced GFC and the Fukushima disaster. If this is what a lost decade looks like, the UK, US would love to have one like it. The difference is that the Japanese today are not the big spenders they were in the 80s and 90s. The economy has slowed down to a more sustainable level, which is healthy for the long term. Living in Asia and seeing the reality on the ground, I'd say that betting on a bust in Japan is a fool's game.