Is This Japan Circa 1992?

With Ben Bernanke of the Fed sacrificing the dollar in a desperate attempt to save jobs and U.S. businesses, it is no wonder the Japanese Yen is spurting back to two-digit levels. At the same time, investors fear the Fed is only putting off the crisis, leaving the US and investors to face tight credit for the next several years as well as stagflation.

Indeed, like the BOJ during Japan’s Heisei Malaise, the Feds “pushing on a string” by providing successive amounts of liquidity at ever lower interest rates will not immediately solve the credit crunch, but will push increasing numbers of exporters and institutional investors out of the US dollar--to the point that the US dollar could become the next major carry trade funding currency.

Thus the current appreciation in the Yen has gone far beyond a mere reversing of the Yen carry trade. It is a full-fledged crash in the US dollar. A 50% depreciation in any currency has got to have negative repercussions, and we believe these repercussions will be much lower values of dollar-based assets as well as a major blow-out in commodity prices.

Major US pension funds, including California’s CalPERs, Illinois, Oklahoma and Pennsylania state pension funds are reducing allocations to indexed US stock investments and are shifting funds to international commodities and real estate.

On the other hand, Japan has always had a strong allergy to a strong JPYUSD exchange rate. Unfortunately, there is nothing Japan (who has yet to agree on a replacement for BOJ governor Fukui whose term expires this month) can do about it. Thus Japan’s economy and corporate profits are currently caught up in the global credit crisis like a ship in a perfect storm. As has repeatedly been the case over the past decade, there is no domestic growth to offset a slowdown in external demand.

But Japan’s Topix is already selling at below stated book value, with 13 of a total 33 sub-sectors selling at PBRs below 1.0X. Moreover, the Yen’s real effective rate is the lowest it has been in 20 years, meaning that Japan’s exports remain relatively competitive even though global demand will decline as the US economy rapidly decelerates.

Comments

[WFlorid:]

Has the dollar depreciated by 50% against the yen?

2008 Mar 11 08:37 AM

[hattryx:]

but against a basket of major trading partner currencies, you could say that is pretty close. there is no carry trade in the usd. that would be the worst trade. the best, of course, is export commodities priced in the usd.

2008 Mar 11 09:33 AM

[Ames Tiedeman:]

Our problems are bad, but disinflation does not actually appear to really be one of them at the moment.

2008 Mar 13 05:52 PM