Tuesday, April 9, 2013

Japan at War


My daughter called last night, she’s made her reservations for a honeymoon in Japan. Six months ago she was leaning on going to Thailand, but the cost of a trip to Japan has fallen so sharply, that she was able to afford the cost of a visit to beautiful Tokyo. She’s delighted.

The dollar cost of a hotel in Tokyo has fallen by a very significant 25% in just a half-year. I’m sure that many other tourist around the world will now consider Japan as a destination for a vacation. The devaluation of the Yen is working!

While I’m happy for my daughter (and those hoteliers in Tokyo) I’m frustrated by the enthusiasm that financial markets have demonstrated by the major devaluation of the Yen. To me, this is a zero sum game. The gains in Japan, are just losses everywhere else.



I see the big losers as Korea, China and the rest of SE Asia. America is going to get hit fairly hard as both tourism and trade react to the cheaper currency. Europe is so screwed up today the consequences of the Yen devaluation will be masked, but the German car exporters will get beat to pieces as the exchange rate adjustment flows through on car prices.  Places like Brazil will feel the consequences as well, liquidity out of Japan will leak into local capital markets, it will be the source of unwanted inflation.

A lot of my readers resent the fact that big money gets bigger because it is big. The Yen devaluation is a classic example. It’s my understanding that some folks have gotten spectacularly rich from the plunge in the Yen. (not just those who made it to the papers) The beauty of the Yen short trade is that there was very little risk. The government telegraphed its intentions perfectly. Damn near every speculator in the world was able to profit from what has happened. The gains are measured in the 100drs of billions of dollars. Once again, the central banks have made market players rich. The vast majority of the speculative currency gains will never get taxed. The rich and powerful just got richer and more powerful

Who will pay for the speculators gains? The Japanese citizens will be forced to kick in a huge chunk. The cost of everything that is imported into Japan is now 25%++ higher than a half year ago. The US economy will surely play a price. How much of a drag to US GDP is the Yen devaluation going to cause? I think the number starts with 1/2 percent.

China is going to get thumped. I don’t think China is just going to roll over and give Japan a free ride. Some retaliation is in the offing. “Things” between China and Japan have been very rocky over the past half-year; they are going to get worse. Japan has created an enemy with China, this will not end well.


In my years of watching FX, I’ve never seen a soft landing from a devaluation.  I don’t think Japan in 2013 will be any different. Japan Inc. may be happy to see the 100/dollar exchange rate, but I doubt that the Bank of Japan can achieve equilibrium at this level. The risk is that the USDJPY overshoots (they always do). There is a very real possibility that things get out of control and a move to USDJPY 120 is in the cards. I see a near zero chance that the BOJ is going to step into the currency market and do reverse intervention to contain Yen the weakness. If enough speculators believe as I do, then we are in for a hell of a ride in the coming months.

Japan is desperately seeking to export its deflation – I think they will succeed. But when the deflationary consequences hit Japan’s trading partners, a global slowdown will be the result. Japan’s trash is being passed around the globe. I wonder how long the rest of the world is going to stand for it. Give it six months (or less) for the damage to be felt in the USA, and then the backlash will start. That, or China does something ugly. Either way, those who are singing praise for Japan and it’s effort to undermine its currency are going to be singing a different tune.

There is a perception that Japan’s monetary policies are directed inward. People like Bernanke are saying that any monetary stimulus is good stimulus, nothing bad can come of it. I don’t see it that way. I see Japan as a global aggressor, the country doesn’t give a damn about where the chips fall outside of its borders.







  1. Japan’s not at war. It’s merely (very belatedly) following your pal Ben’s lead. If China is pissed, it should blame Ben. He’s the one who legitimized monetary insanity. BTW, USD/JPY was around ¥120 back in 2007-08, before Lehman blew up. Its return to that vicinity would not be cataclysmic. Japanese consumers have benefitted from a uber-strong yen for five years and now they face normalization. No big deal.

    p.s., If Japan restarts enough of its nuclear reactors, its C/A balance would swing back into surplus.

    • USA has been exporting inflation around the whole world. If the crisis of gluttony would have never happened in USA, Japan’s currency would have stayed at USDJPY 100-120 before 2008. I agree with all your points accept that Japan doesn’t care everyone else. USA declared economic war first.

  2. Great point Vito. Banana Ben has acheived all time highs in US equity indices. I would say Abe has a ways to go to catch up.

  3. Yeah Tokyo is a hot place right now.

    A honeymoon there and your daughter should come home glowing.

    Haven’t traded FX in years, but I do like your commentary Bruce. Ignore the snark above and wish your daughter well. Great days when a daughter gets married.

  4. damm BK,just a common sense blog of facts.No Ivy league degree needed.Only wish i had a crystal ball on the YEN trade you seem to covet.

  5. What is the correct valuation of any currency?

    The mean valuation of the JPY/USD over 30 years is 150 yen to the dollar. JPY at 70+ is the highest in 30 years.

    Is the BOJ any more guilty than the SNB?

    Or the Fed?



  6. Throw up a chart on all the stimulus and CB monetary actions and Japan is way behind Europe, China and the US..

  7. Congratulation Bruce regarding the marriage of your daughter. Best wishes to all.

  8. I guess the question we need to ask is: what can you expect from a nation that is defined by Holocaust Denial ? US media gives Iran a hard time, but Japan, unlike Iran, was the perpetrator of its own Holocaust.

    Another question: why is it I see the North Korean war ‘threats’ all over mainstream media… but barely a whimper about the aggressive currency war Japan is waging against us (and its neighbors)?

  9. http://research.stlouisfed.org/fred2/graph/?g=hnv

    yen in blue
    yuan in red

    Japan has assembled a +$3T (+50% GDP) NIIP, which is why its currency moved to 80.

    Other stand-out NIIP winners:

    Hong Kong (+340% GDP)
    Singapore (+220% GDP)
    Taiwan (+150% GDP)
    PRC (+40% GDP)

    Japan’s hourly wage is East Asia’s daily wage!

    But, yeah, South Korea is going to get hit in this latest devaluation move.

  10. What is the chance that the North Korea thing is a result of this Japan move?

  11. “Damn near every speculator in the world was able to profit from what has happened.”

    Judging by the various FX manager indices, most pros did not catch this move in size. I wonder how many actually caught it at all. FX CTA and Parker FX returns are abysmal since the yen move began..


  12. The North Korea thing is a result of US policy shifting towards applying pressure to NK. It seems like Obama wants to continue with some Axis sh*t. Tells you a lot about who is in charge. Plus ca change etc..

    Some weird comments to Bruce’s post that I agree with wholeheartedly. So whether you think 80 or 100 is the right exchange rate, doesnt change the temperature shift that will be experienced by Japanese consumers or German car workers. Its a competitive deval, and if it gets much bigger it will be approaching the scale of the one in 1998. Remember that one? Still sure there are no side effects?

  13. Gold is money …. and now that it trades in real-time (and can float higher), it has the liquidity that it has never had before.

    What more could the world want than debt-free, store of value that is instantly liquid on a global basis ?
    We don’t have a monetary design problem. We simply have a marketing challenge.

  14. If I take this thesis forward that basically Japan is exporting deflation to the rest of the world …then classic inflation hedges should become secular shorts
    The long term charts of Gold (using GLD US as a proxy) and TIPS (TIP US as a proxy) seem to suggest that the uptrend seems to have been broken and a longer term downtrend maybe setting in.

  15. Bruce — you remember your post from last summer/fall (not sure exact date) about the midwest drought? Turns out, even according to the leftist extremists running the country, the drought was natural and not caused by man at all:


    (CNN) — Extreme natural events, not man-made climate change, led to last summer’s historic drought in the Great Plains, a new federal study said Friday.

    Drought occurred in six Plains states between last May and August because moist Gulf of Mexico air “failed to stream northward in late spring,” and summer storms were few and stingy with rainfall, said a report by the National Oceanic and Atmospheric Administration….

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