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  • Japan fiddles while their economy burns? 0 comments
    Dec 1, 2009 1:20 PM | about stocks: UUP, UDN, GLD, FXY, YCL, YCS, JPXN, TYI, EWJ
    The market is apparently disappointed with the BoJ policy announcement today as it showed no commitment to weakening the Yen, and consequently risk assets are 'partying like its 1999' and the US Dollar is back to its role as No. 1 funding currency.

    Nero fiddled while Rome burnt, but then he used the opportunity to rebuild Rome.

    Given that the strong Yen must be putting severe pressure on many Japanese businesses and given there may not be much of an export demand rebound next year as the global liquidity-driven rally meets the problem of high unemployment in the West, could it be that the new Japanese administration want a higher Yen in order to finally purge the excesses in the economy through a deflationary liquidation? Taken with this policy action, the fact that corporate borrowings are around 180% of GDP and bank assets are around 200% of GDP, these two policies may wipe out many of the domestic banks which I understand have not been forced to recapitalise recently. So is the government's plan that from the ashes a new Japan can emerge?

    The only small snag to this plan, if it is what the new government has in mind, is that the worsening domestic economy will further put pressure on the government’s ability to fund itself given a debt burden of around 200% of GDP. This combined with the aging demographic and a falling savings rate may at some point may cause a confidence crisis in the Yen.

    What ever happens in Japan, an economy with 450% debt to GDP which is internally funded through massive wealth imbalances and a weak and highly leveraged corporate sector is an inherently unstable economy and its far from clear that Japan has put the fires out yet.

    Disclosure: No positions
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