My daughter called last night, she's made her reservations for a honeymoon in Japan. Six months ago she was leaning on going to Thailand, but the cost of a trip to Japan has fallen so sharply, that she was able to afford the cost of a visit to beautiful Tokyo. She's delighted.
The dollar cost of a hotel in Tokyo has fallen by a very significant 25% in just a half-year. I'm sure that many other tourist around the world will now consider Japan as a destination for a vacation. The devaluation of the Yen is working!
While I'm happy for my daughter (and those hoteliers in Tokyo) I'm frustrated by the enthusiasm that financial markets have demonstrated by the major devaluation of the Yen. To me, this is a zero sum game. The gains in Japan, are just losses everywhere else.
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I see the big losers as Korea, China and the rest of SE Asia. America is going to get hit fairly hard as both tourism and trade react to the cheaper currency. Europe is so screwed up today the consequences of the Yen devaluation will be masked, but the German car exporters will get beat to pieces as the exchange rate adjustment flows through on car prices. Places like Brazil will feel the consequences as well, liquidity out of Japan will leak into local capital markets, it will be the source of unwanted inflation.
A lot of my readers resent the fact that big money gets bigger because it is big. The Yen devaluation is a classic example. It's my understanding that some folks have gotten spectacularly rich from the plunge in the Yen. (not just those who made it to the papers) The beauty of the Yen short trade is that there was very little risk. The government telegraphed its intentions perfectly. Damn near every speculator in the world was able to profit from what has happened. The gains are measured in the 100drs of billions of dollars. Once again, the central banks have made market players rich. The vast majority of the speculative currency gains will never get taxed. The rich and powerful just got richer and more powerful
Who will pay for the speculators gains? The Japanese citizens will be forced to kick in a huge chunk. The cost of everything that is imported into Japan is now 25%++ higher than a half year ago. The US economy will surely play a price. How much of a drag to US GDP is the Yen devaluation going to cause? I think the number starts with 1/2 percent.
China is going to get thumped. I don't think China is just going to roll over and give Japan a free ride. Some retaliation is in the offing. "Things" between China and Japan have been very rocky over the past half-year; they are going to get worse. Japan has created an enemy with China, this will not end well.
In my years of watching FX, I've never seen a soft landing from a devaluation. I don't think Japan in 2013 will be any different. Japan Inc. may be happy to see the 100/dollar exchange rate, but I doubt that the Bank of Japan can achieve equilibrium at this level. The risk is that the USDJPY overshoots (they always do). There is a very real possibility that things get out of control and a move to USDJPY 120 is in the cards. I see a near zero chance that the BOJ is going to step into the currency market and do reverse intervention to contain Yen the weakness. If enough speculators believe as I do, then we are in for a hell of a ride in the coming months.
Japan is desperately seeking to export its deflation - I think they will succeed. But when the deflationary consequences hit Japan's trading partners, a global slowdown will be the result. Japan's trash is being passed around the globe. I wonder how long the rest of the world is going to stand for it. Give it six months (or less) for the damage to be felt in the USA, and then the backlash will start. That, or China does something ugly. Either way, those who are singing praise for Japan and it's effort to undermine its currency are going to be singing a different tune.
There is a perception that Japan's monetary policies are directed inward. People like Bernanke are saying that any monetary stimulus is good stimulus, nothing bad can come of it. I don't see it that way. I see Japan as a global aggressor, the country doesn't give a damn about where the chips fall outside of its borders.
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