Global equities continue to stumble as evidence mounts that the economic recovery has lost momentum, perhaps lending credence that there indeed, will be a dreaded double dip recession. While the US and Japanese economies falter, ironically both the USD and the yen are benefiting as a sanctuary, safe from the ravages of troubled economic times.
In the US, it has become increasing evident that the highly touted stimulus plan has failed. Yes, there were jobs saved, for a while, as these funds were used to keep federal, state, and local government workers as well as teachers on the payroll, but the private sector has been scared by the myriad of new taxes and regulations enacted into law by the current congress. Officials of the current administration may know how to teach and administer at elite ivy league school, but they are clueless to the needs of small business.
The US government's taxes and regulations will postpone many new hires by business which will stifle a recovery. The Japanese government has suffered from slow or no growth for years and that has not deterred popularity of the yen. For example growth of the GDP from 2000 to 2007 was but 2.5%. The Japanese are also hampered by an aging population, no significant immigration, and no population growth. Currently over 25% of Japan's 127 million population are over 65. The Japanese government benefits because this group has been life time savers and they have continually bought the Japanese bonds that finance the big government deficits.
As the yen is buoyed by the safe-haven investors, the Japanese exporters are hurt and the economy suffers. The real gross domestic product grew by only 0.4% in the most recent April-June quarter down from 4.4% in the previous quarters. Exporters, having planned on a 90 level yen are having a difficult time making profitable export sales with the yen as strong as 85. The government and the Bank of Japan claim they are continuing to study how the strong currency will affect their economy. So far they are only giving lip service to a weaker yen. Rest assured, however, that the big export trade is lobbying for relief.
One group that is benefiting by the strong yen is the Japanese tourist. Kyoto news reports:
"Rush for foreign currencies is on... A growing number of Japanese, including those planning to travel overseas, are converting their yen into foreign currencies, taking advantage of its relative strength of less than 90 to the dollar since last month.
For July, Mitsubishi UFJ Financial Group reported a 60 percent jump from a year ago in both the number of currency exchange transactions and their value at its foreign exchange shops across Japan."
The USD/JPY had been consolidating around the 85 handle for almost three weeks. Both the Japanese government and the Central Bank have been talking, perhaps wishing, for a weaker yen. While neither body has been noted for quick decisive actions, we would prefer to be long the USD/JPY in the 85.50 area, just in case something happens. The market has traded under 85 several times with no follow through, so maybe the exporters will get their way and we get a rally back to 90.
Disclosure: No positions