Less than two months ago, Albert Edwards presented "The Most Important Chart For Investors" in which he predicted, correctly, that the real action will come not in the Euro but the Japanese Yen, and at a time when the USDJPY was trading around 108, Edwards forecast a sharp move to 120. A month later, Abe's just as shocking "all in" bet on boosting QE to a level where it matches the Fed's peak monthly POMO despite an economy that is a third the size of the US, proved Edwards correct and has since sent the USDJPY some 800 pips higher and just 400 pips shy of Edwards' 120 forecast. At this rate, the 120 target may be taken out within weeks not months.
So what happens next? Here, straight from the horse's mouth that got the first part of the rapid Yen devaluation so right, is the answer. As Edwards updates with a note from this morning, "the yen is set to follow the US dollar DXY trade-weighted index by crashing through multi-decade resistance - around ¥120. It seems entirely plausible to me that once we break ¥120, we could see a very quick ¥25 move to ¥145, forcing commensurate devaluations across the whole Asian region and sending a tidal wave of deflation westwards."
Edwards, never one to beat around the bush, slams strategists who are at best willing to get the direction of a given move, if not the magnitude. So he will be the outlier:
... in the foreign exchange (FX) world, extreme volatility is often readily apparent but seldom ever predicted. We explained recently that investors were overly focusing on the euro/US$ when a further round of Japanese QE would make the yen the dominant currency story. I expect the key ¥120/$ support level to be broken soon and the lows of June 2007 (¥124) and Feb 2002 (¥135) to be rapidly taken out. If you want a target to reflect historic volatility, think about the Y145 low of August 1998 (see chart). That is my Q1 forecast.
In other words, just over 4 months until the USDJPY is devalued by 25%. And pundits lament the move in the Russian ruble...
Continuing Edwards' technical analysis, in addition to USDJPY 145, his other forecast is for the EURJPY to soar to 170!
With the yen about to fall below the recent low of January this year of ¥145.70/?, the next stop in my view will be the July 08 low of ¥170 - another 20% rise in the euro on top of the 50% rise seen since Japan began devaluing at end-2012. South Korea is in a similar situation- i.e. close to deflation with an anaemic economy and practically no technical support between here and Y750/won- the 2007 low. These will be bone-crushing, deflation-inducing moves.
While such a move would be truly historic, Japan is now beyond the point of no return, and once it has engaged the afterburners it has to ride it out until the bitter end. It is here that the BOJ differs so much from the ECB:
The move to crank up the Japanese printing shouldn?'t have been a surprise. These guys at the BoJ, unlike the ECB, WILL do whatever it takes. Peter Tasker wrote in the Nikkei Asian Review that Kuroda?s tactics resemble the famous Ali/Foreman ?rumble in the jungle? exactly 40 years ago. His article, Kuroda Unchained, also explains why there is little domestic Japanese pushback on QE. Peter writes, “First, the claim that quantitative easing benefits only “bankers” and the rich is unlikely to gain much traction. In terms of the distribution of assets, Japan is a highly egalitarian society. According to a recent study by Credit Suisse Research Institute, the proportion of total wealth held by the top 10% was the second lowest in the 46 countries analysed. The 2014 Billionaire Census compiled by Wealth X and UBS indicates that there are more billionaires in Istanbul than there are in the whole of Japan.”
Which leads to the final question: how will everyone else responds? And respond they will: in a world in which global trade is neck deep in quicksand and sinking, the only recourse is beggaring they neighbor faster than they can beggar you. For now Japan is winning, but that will hardly remain the case.
For those who say the US simply won?t allow the yen to fall so rapidly, I would reply that Japan too won?t want to annoy the US too much, especially as they rely on the US military umbrella at a time of increasing friction with China in the South China Sea. Nevertheless I simply think Japan will lose control of the situation given the quantity of QE being spewed into the markets and unless the US, the eurozone, or indeed Korea, is prepared to come remotely close to Japan?s rate of QE, jawboning currency stability will do very little. But I do believe the yen devaluation will drag down other competing currencies in the Asian region, which brings us onto China. After a record 32 successive months of deflation at the producer price level, China has suffered as much PPI deflation over the past three years as it did in the immediate aftermath of the 1997 Asian crisis. Do investors really think China can cope with a devaluation of the yen from here? They simply can?t tolerate this and they won?t. They will devalue.
End result: Japan will unleash "a tidal wave of deflation westwards" at least until the Fed and its western peers respond in kind and return to doing what they all do best: printing money in hope of stimulating their own inflation and offseting the importing of Japan's deflation, which will also bring everyone back to square one, and will certainly be the end-game in the global currency wars.