Currency Suicide: Japan Experiencing The Ugly Effects Of Its Own Policy

Exactly a year ago, Japan announced its monstrous monetary stimulus, beating even Helicopter Bernanke who had just started its fourth round of QE. The Japanese government was fed up with deflation and decided to stimulate their economy with massive liquidity (QE).The Nikkei index started an historic rally with a gain of 50% in less than half a year (see barchart on the chart below). The value of the Yen dropped like a stone (see black line on the chart below). The aim of a weaker Yen was to stimulate exports. So it should have been a win-win-win situation, at least on paper.

Japanese yen vs NIKKEI 2013 money currency

We are lied to told every day again that weak currencies are a good thing as they stimulate export and increase the economic output (rising GDP). While that could be true, there are a lot of conditions and consequences that are associated with it. One condition, for instance, is that all other countries should keep the value of their currency flat, which is obviously not the case in Currency War III.

Patrick Barron explains how mainstream economists believe that currency devaluation exports unemployment to its trading partners, apart from enhancing sales from exports. “They call for their own countries to engage in reciprocal measures. Recently Martin Wolfe (Financial Times in London) and Paul Krugman (New York Times in the US) both accuse their countries’ trading partners of engaging in this “beggar-thy-neighbor” policy and recommend that England and the US respectively enter this so-called “currency war” with full monetary ammunition to further weaken the pound and the dollar.” This is no currency war, this is currency suicide. Source: Mises.org.

One of the consequences of Japan’s intended currency debasement is now starting to show its ugly head. The cheaper Yen may be intended to stimulate exports but it simultaneously makes imports more expensive.

From Japan Times:

Japan is likely to post a record trade deficit in fiscal 2013 because the weaker yen and soaring demand for energy have driven up the cost of importing fossil fuels, according to a projection by a trade business group.

The deficit is expected to expand to ¥12.1 trillion during the year through next March, much worse than the ¥8.18 trillion in fiscal 2012 and the largest since comparable data became available in fiscal 1979, the Japan Foreign Trade Council Inc. said Thursday.

The economy will log a trade deficit for the third straight year, according to the organization, which is composed of companies involved in international trade activities.

Exports in fiscal 2013 are forecast to rise 9.8 percent from the previous year to ¥70.18 trillion, sustained by the yen’s fall, while imports are expected to climb 14.1 percent to ¥82.28 trillion, JFTC said.

A sliding yen usually supports exports by making Japanese products cheaper abroad and boosts the value of overseas revenues in yen terms, but it also increases import prices. Japan depends on imports for more than 90 percent of its energy needs.

Unfortunately, the economy is not as simple as central planners pretend it to be, at least not in the 21st century. The globally interconnected world, the huge volumes of derivatives (currently tenfold the global GDP), the increasingly complex financial world, the “easy money” policies from competing regions … all play an almost unpredictable role. We have not seen to date a model from the academicians at the central banks taking those variables into account.

Speculative effect

The consequence in the real world of the weaker Yen is not only limited to more expensive imports. Another ugly effect is that the speculative effect kicks in, accelerating the “unintended consequences.” As the Yen got back into is declining trend, hedge funds took notice of this and are now betting on a continuing decline. As Zerohedge notes: “While ‘economists’ are less convinced that the JPY will weaken further, and even the Japanese officials somewhat jawboning the currency’s stability now, futures traders have pushed ‘net shorts’ (i.e. bets against the JPY) to their highest since July 2007. Between the possibility of a Fed taper (stronger USD) and fading economic gains (more BoJ QQE), it would appear that Japan’s $70bn per month buying program is not going to shrink anytime soon. While the world has grown accustomed in recent months to ‘hating’ gold – despite the ECB and BoJ rumors of more money-printing and an inevitable un-taper by the Fed – for now, the ‘dislike’ of the JPY has exploded.” Precious metals investors have learned in 2013 that a price crash is likely when hedge funds go aggressively short.

japanese yen vs gold short positions november 2013 money currency

 

The message we are trying to bring across is not that a crash is inevitable and imminent. We point out that it is likely to happen and that these are consequences of interventions.

The sentiment indicators provide a confirmation of the ultra weak Yen. As the latest Sentimentrader report shows, the Yen carries the most negative sentiment of the major currencies.

currencies sentiment november 2013 money currency

Precious metals sentiment is not much better, but that is not surprising, at least not in the worst year for the metals since four decades.

metals sentiment november 2013 money currency

Key takeaways

What is the key take-away from this evolution? We see several conclusions and learnings in the bigger scheme of things, so this does not concern traders but only investors:

  1. Currency wars are here to stay. As Rickards has noted, currency wars are like real wars; there is not a continuing war all the time but there are different battles over time. Prepare for more to come, even more importantly, expect much worse in the current decade.
  2. Do not rely on the narrative of governments. They have their own interest and they will only tell you half the truth. Currency devaluations have a very damaging effect. They are simply one of the many monetary tools of central banks hoping to solve a structural problem. Our structural problems are so big that a normalization of economic conditions will come with a lot of pain and “unintended” consequences.
  3. Gold’s key benefit, i.e. the ultimate monetary insurance policy, remains intact. The currency war seems under control. As the sentiment figures show, the dollar is still the best of all bad currencies. When the dollar starts sliding, gold owners will have the best protection. It could still take several years before that happens, as the strength of the petrodollar hegemony should not be underestimated. It is better to be prepared in advance.

Be prepared. The fundamental outlook is NOT one of an economic recovery.



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