The Yen Needs to Depreciate

The dramatic decline of the Japanese economy, with a record annualized 12.7% negative growth, is not surprising at all. With the global economy in recession and a much over-valued Yen, export-dependent Japan has no where to go but down. But this will be to the detriment of everybody. An excessively strong Yen goes against the interest of everybody except those who have longed Yen.

Why is Japan so export dependent? Japan has no choice, because Japan has a huge population and has little natural resources. Japan has to import a lot to feed, clothe, and even house its population; that is why it has to export a lot. If Japan's export engine stalls, it cannot simply switch to production for the domestic market, since all the raw materials will have to be imported. Already Japan has been experiencing trade deficits for several months in a row. Its current account surplus, which includes net factor incomes earned overseas, also has been shrinking. With the export sector in shambles and net investment income falling, it is possible that even the current account turn into red.

It is frustrating for me to observe Japanese officials trying to bolster the stock market but doing nothing to avert the senseless appreciation of the Yen. At such levels, almost every manufacturing concern in Japan would fail. Artificially supporting stock prices would not work! But the Bank of Japan can sell Yen; indeed it can sell as much Yen as the market wants. There is no worry this will create excess liquidity, because should the Yen depreciate excessively, and at any sign of inflation, the central bank can mop up the excess Yen just as easily as it had sold the Yen in the first place.

The excessively strong Yen is not helping other countries to export to Japan at all, because when unemployment and bankruptcies are on the rise, Japan's imports can only go down.

In part because Japan's share in world trade is shrinking fast, world trade is also shrinking fast, hurting everybody. Order needs to be restored to the foreign exchange market before the world's second largest economy can have any chance of recovering.

Comments

[dpro0102:]

What now - no currency manipulation to hide behind? Perhaps the Japanese companies will have to find a way to compete without protectionism? Honestly - I am shedding no tears for them. What happened to the $$ Billions in profits made from an artificially weak yen. Maybe they should have prepared for this eventuality.

Feb 17 10:02 AM

[Jolly_Rancher:]

Be patient. Japanese import prices are plummeting much faster than export prices. Corporate profits will stabilize soon and rise by fall 2009. Speculators are crazy. They wrecked the oil market and now the currency market. Too much liquidity still out there. They will be punished with a hard falling yen.

Feb 17 12:06 PM

[HaavBline:]

This article is a bunch of nonsense. “No resources” is just a Japanese excuse for maintaining their mercantilistic trade policies forever without shouldering responsibilities of a rich nation.

Japan is no Hong Kong. It is the 2nd largest economy in the world by GDP. It has one of the largest population is the world. Its people enjoys per capita GDP that equals any western countries. Its territory claims stretches far beyond its four main islands deep into the pacific ocean. They just happened to lack oil and industrial metals, commodities they needed in an earlier stage of industrial development but no longer needed in great amounts because they have upgraded their industries to the high value-add and low energy consumption industries.

Japan’s export-driven growth model already reached its limits last time their bubble popped in the late 80s. They have had 20 years to make the adjustment to slowly move to a domestic growth model and they failed completely, because they never really tried. They apply zero interest rate policy without policies that stimulate domestic growth and consumption, this created the Yen Carry Trade which every salary men and housewives participated. Driving tides and tides of liquidity to other markets, contributing to the global asset bubble directly.

The Yen appreciation after the global crisis began is the direct result of tens of millions of Japanese unwinding their Carry Trade fearing they will lost their principle. When they sold foreign assets and return the money to Japan, they had to buy Yen and pushed up its value.

As the 2nd largest economy and the largest and richest in Asia, Japan should not shirk its responsibility to maintain a domestic driven market economy in Asia. They should exit the export-driven growth game and allow poorer Asian countries to sell the Japan’s domestic market so as to help facilitate these other countries to climb the wealth accumulation ladder which eventually will turn Asia into the largest integrated domestic markets in the world, and thereby helping themselves sustain economic growth and high quality of life.

A higher Yen valuation should be maintained in order to push the Japanese toward this direction.

As of now, the world will NOT miss out when Japanese trade craters at all, because few countries depend on selling to their domestic markets.

Feb 17 11:23 PM

[Lok Sang Ho:]

Japan of course is the second largest economy but it has little natural resources. Its huge population need accommodation, food, energy, clothing, transportation, if nothing else. All of these things need to be produced with imported raw materials, even though it is highly capable in terms of the arts of production.

China can meaningfully switch to home production without importing a lot even if its exports industries crumble. Not so with Japan. Japan can never be self sufficient.




On Feb 17 11:23 PM HaavBline wrote:

> This article is a bunch of nonsense. “No resources” is just a Japanese
> excuse for maintaining their mercantilistic trade policies forever
> without shouldering responsibilities of a rich nation.
>
> Japan is no Hong Kong. It is the 2nd largest economy in the world
> by GDP. It has one of the largest population is the world. Its
> people enjoys per capita GDP that equals any western countries.
> Its territory claims stretches far beyond its four main islands deep
> into the pacific ocean. They just happened to lack oil and industrial
> metals, commodities they needed in an earlier stage of industrial
> development but no longer needed in great amounts because they have
> upgraded their industries to the high value-add and low energy consumption
> industries.
>
> Japan’s export-driven growth model already reached its limits last
> time their bubble popped in the late 80s. They have had 20 years
> to make the adjustment to slowly move to a domestic growth model
> and they failed completely, because they never really tried. They
> apply zero interest rate policy without policies that stimulate domestic
> growth and consumption, this created the Yen Carry Trade which every
> salary men and housewives participated. Driving tides and tides
> of liquidity to other markets, contributing to the global asset bubble
> directly.
>
> The Yen appreciation after the global crisis began is the direct
> result of tens of millions of Japanese unwinding their Carry Trade
> fearing they will lost their principle. When they sold foreign assets
> and return the money to Japan, they had to buy Yen and pushed up
> its value.
>
> As the 2nd largest economy and the largest and richest in Asia, Japan
> should not shirk its responsibility to maintain a domestic driven
> market economy in Asia. They should exit the export-driven growth
> game and allow poorer Asian countries to sell the Japan’s domestic
> market so as to help facilitate these other countries to climb the
> wealth accumulation ladder which eventually will turn Asia into the
> largest integrated domestic markets in the world, and thereby helping
> themselves sustain economic growth and high quality of life.
>
> A higher Yen valuation should be maintained in order to push the
> Japanese toward this direction.
>
> As of now, the world will NOT miss out when Japanese trade craters
> at all, because few countries depend on selling to their domestic
> markets.

Feb 18 09:07 AM

[Mad Hedge F...:]

Every night the evening news in Japan refers to the “Great American Depression”. Do they know something we don’t? I hear largely inaccurate comparisons to our current economic debacle to Japan’s lost decade on an almost daily basis. But there is one thing both have in common. Nobody believes for a second the securities the banks own are worth what they say they are worth. That’s what bank hoarding of capital is telling you. The question here remains, how quickly can the banks be forced to face the music?

Feb 18 11:59 AM

[Lok Sang Ho:]

I should add that if Japan or China became self sufficient and does not trade with the rest of the world, the entire world will suffer.



On Feb 17 11:23 PM HaavBline wrote:

> This article is a bunch of nonsense. “No resources” is just a Japanese
> excuse for maintaining their mercantilistic trade policies forever
> without shouldering responsibilities of a rich nation.
>
> Japan is no Hong Kong. It is the 2nd largest economy in the world
> by GDP. It has one of the largest population is the world. Its people
> enjoys per capita GDP that equals any western countries. Its territory
> claims stretches far beyond its four main islands deep into the pacific
> ocean. They just happened to lack oil and industrial metals, commodities
> they needed in an earlier stage of industrial development but no
> longer needed in great amounts because they have upgraded their industries
> to the high value-add and low energy consumption industries.
>
> Japan’s export-driven growth model already reached its limits last
> time their bubble popped in the late 80s. They have had 20 years
> to make the adjustment to slowly move to a domestic growth model
> and they failed completely, because they never really tried. They
> apply zero interest rate policy without policies that stimulate domestic
> growth and consumption, this created the Yen Carry Trade which every
> salary men and housewives participated. Driving tides and tides of
> liquidity to other markets, contributing to the global asset bubble
> directly.
>
> The Yen appreciation after the global crisis began is the direct
> result of tens of millions of Japanese unwinding their Carry Trade
> fearing they will lost their principle. When they sold foreign assets
> and return the money to Japan, they had to buy Yen and pushed up
> its value.
>
> As the 2nd largest economy and the largest and richest in Asia, Japan
> should not shirk its responsibility to maintain a domestic driven
> market economy in Asia. They should exit the export-driven growth
> game and allow poorer Asian countries to sell the Japan’s domestic
> market so as to help facilitate these other countries to climb the
> wealth accumulation ladder which eventually will turn Asia into the
> largest integrated domestic markets in the world, and thereby helping
> themselves sustain economic growth and high quality of life.
>
> A higher Yen valuation should be maintained in order to push the
> Japanese toward this direction.
>
> As of now, the world will NOT miss out when Japanese trade craters
> at all, because few countries depend on selling to their domestic
> markets.

Feb 19 11:17 PM

[Lok Sang Ho:]

The current account did turn into red as predicted. Fortunately the Yen did depreciate significantly after this article was published. But it needs to go down more.

Mar 10 09:04 PM

[Gavin Wright:]

Of course Japan being a creditor nation with traditionally low interest rates didn't help its currency in the past, as every house wife participated in exporting its savings to the USA by selling the Yen and buying dollar assets - we have a paradigm shift about to happen here as the consensus on the USA will shift to it being seen as not much better than a banana republic; our equities rallies will continue to fizzle out, march to 500 or lower on S&P will continue, economic news will continue to be horrible and then the Fed/Treasury will start more aggressively to buy long dated Treasuries and drive our rates to zero and flood our economy with dollars in an attempt to inflate (and get folks to spend and to rise incomes relative to debt loads) and this will make the dollar sink relative to gold - but also the Japanese housewife will do the risk adverse thing as BOJ will not be able to cause inflation there and rates will remain low in Japan but scale of US money printing will overall lead to massive devaluation vis-a-vis other economies of lower inflation and deficits - including Japan. The devaluation will lead to a US stock market rallyeventually but in Yen terms that market will go nowhere - as Japanese exit the carry trade and move their money home as they see the dollar buy less gold, less crude, and pay less interest.

Japan has a failed export economy which it needs to cede to the rest of Asia - its imports will be cheaper under this scenario and it should still be able to export but selling to the US will be tough - I don't know - who will print more currency BOJ to keep its currency weak relative to the dollar or Fed to get out of a potential depression? I think relatively speaking the Fed will and I believe the BOJ will give up once the magnitude of the increase in monetary supply necessary to save us becomes clear to the world ...

I agree with you that when economies recover that yen gets sold & carry trade resumes BUT I believe we are still only in the second inning here of a very long game - and that USA GDP drop will be considerably worse than consensus and do not, do not, underestimate the political system's talent for screwing this up. It will continue to do too little too late. The fiscal stimulus is a joke and will be no where near big enough to make up for difference in the drop in demand. The ride will be getting much rougher.

I am unsure about the timing of a Yen appreciation; BOJ could screw up this trade for awhile; still the dollar is going to have to be printed massively and not the Yen. TOf course Japan being a creditor nation with traditionally low interest rates didn't help its currency in the past, as every house wife participated in exporting its savings to the USA by selling the Yen and buying dollar assets - we have a paradigm shift about to happen here as the consensus on the USA will shift to it being seen as not much better than a banana republic; our equities rallies will continue to fizzle out, march to 500 or lower on S&P will continue, economic news will continue to be horrible and then the Fed/Treasury will start more aggressively to buy long dated Treasuries and drive our rates to zero and flood our economy with dollars in an attempt to inflate (and get folks to spend and to rise incomes relative to debt loads) and this will make the dollar sink relative to gold - but also the Japanese housewife will do the risk adverse thing as BOJ will not be able to cause inflation there and rates will remain low in Japan but scale of US money printing will overall lead to massive devaluation vis-a-vis other economies of lower inflation and deficits - including Japan. The devaluation will lead to a US stock market rallyeventually but in Yen terms that market will go nowhere - as Japanese exit the carry trade and move their money home as they see the dollar buy less gold, less crude, and pay less interest.

Japan has a failed export economy which it needs to cede to the rest of Asia - its imports will be cheaper under this scenario and it should still be able to export but selling to the US will be tough - I don't know - who will print more currency BOJ to keep its currency weak relative to the dollar or Fed to get out of a potential depression? I think relatively speaking the Fed will and I believe the BOJ will give up once the magnitude of the increase in monetary supply necessary to save us becomes clear to the world ...

I agree with you that when economies recover that yen gets sold & carry trade resumes BUT I believe we are still only in the second inning here of a very long game - and that USA GDP drop will be considerably worse than consensus and do not, do not, underestimate the political system's talent for screwing this up. It will continue to do too little too late. The fiscal stimulus is a joke and will be no where near big enough to make up for difference in the drop in demand. The ride will be getting much rougher.

I am unsure about the timing of a Yen appreciation; BOJ could screw up this trade for awhile; still the dollar is going to have to be printed massively and not the Yen. Everyone sOf course Japan being a creditor nation with traditionally low interest rates didn't help its currency in the past, as every house wife participated in exporting its savings to the USA by selling the Yen and buying dollar assets - we have a paradigm shift about to happen here as the consensus on the USA will shift to it being seen as not much better than a banana republic; our equities rallies will continue to fizzle out, march to 500 or lower on S&P will continue, economic news will continue to be horrible and then the Fed/Treasury will start more aggressively to buy long dated Treasuries and drive our rates to zero and flood our economy with dollars in an attempt to inflate (and get folks to spend and to rise incomes relative to debt loads) and this will make the dollar sink relative to gold - but also the Japanese housewife will do the risk adverse thing as BOJ will not be able to cause inflation there and rates will remain low in Japan but scale of US money printing will overall lead to massive devaluation vis-a-vis other economies of lower inflation and deficits - including Japan. The devaluation will lead to a US stock market rallyeventually but in Yen terms that market will go nowhere - as Japanese exit the carry trade and move their money home as they see the dollar buy less gold, less crude, and pay less interest.

Japan has a failed export economy which it needs to cede to the rest of Asia - its imports will be cheaper under this scenario and it should still be able to export but selling to the US will be tough - I don't know - who will print more currency BOJ to keep its currency weak relative to the dollar or Fed to get out of a potential depression? I think relatively speaking the Fed will and I believe the BOJ will give up once the magnitude of the increase in monetary supply necessary to save us becomes clear to the world ...

I agree with you that when economies recover that yen gets sold & carry trade resumes BUT I believe we are still only in the second inning here of a very long game - and that USA GDP drop will be considerably worse than consensus and do not, do not, underestimate the political system's talent for screwing this up. It will continue to do too little too late. The fiscal stimulus is a joke and will be no where near big enough to make up for difference in the drop in demand. The ride will be getting much rougher.

I am unsure about the timing of a Yen appreciation; BOJ could screw up this trade for awhile; still the dollar is going to have to be printed massively and not the Yen. TOf course Japan being a creditor nation with traditionally low interest rates didn't help its currency in the past, as every house wife participated in exporting its savings to the USA by selling the Yen and buying dollar assets - we have a paradigm shift about to happen here as the consensus on the USA will shift to it being seen as not much better than a banana republic; our equities rallies will continue to fizzle out, march to 500 or lower on S&P will continue, economic news will continue to be horrible and then the Fed/Treasury will start more aggressively to buy long dated Treasuries and drive our rates to zero and flood our economy with dollars in an attempt to inflate (and get folks to spend and to rise incomes relative to debt loads) and this will make the dollar sink relative to gold - but also the Japanese housewife will do the risk adverse thing as BOJ will not be able to cause inflation there and rates will remain low in Japan but scale of US money printing will overall lead to massive devaluation vis-a-vis other economies of lower inflation and deficits - including Japan. The devaluation will lead to a US stock market rallyeventually but in Yen terms that market will go nowhere - as Japanese exit the carry trade and move their money home as they see the dollar buy less gold, less crude, and pay less interest.

Japan has a failed export economy which it needs to cede to the rest of Asia - its imports will be cheaper under this scenario and it should still be able to export but selling to the US will be tough - I don't know - who will print more currency BOJ to keep its currency weak relative to the dollar or Fed to get out of a potential depression? I think relatively speaking the Fed will and I believe the BOJ will give up once the magnitude of the increase in monetary supply necessary to save us becomes clear to the world ...

I agree with you that when economies recover that yen gets sold & carry trade resumes BUT I believe we are still only in the second inning here of a very long game - and that USA GDP drop will be considerably worse than consensus and do not, do not, underestimate the political system's talent for screwing this up. It will continue to do too little too late. The fiscal stimulus is a joke and will be no where near big enough to make up for difference in the drop in demand. The ride will be getting much rougher.

I am unsure about the timing of a Yen appreciation; BOJ could screw up this trade for awhile; still the dollar is going to have to be printed massively and not the Yen. The way to hedge dollar risk is by owning the yen, not gold; further, there is much more risk in owning the dollar than the Yen as the world comes to see the USA as almost a banana republic and as Obama and the Fed realize this is a 1930 moment - inflate or die. The paradigm shifts.

Mar 17 06:45 PM