Once Japanese automakers have dug out from under the rubble, cleared the ports and start shipping again, they will face a possibly bigger problem: A killer yen that has accumulated strength in an absolutely abnormal fashion over the last few days.
It stands to reason that the currency of a country grappling with damages of around $200 billion would suffer along. However, this is not how it works here. Japan is not a debtor country. With nearly $900 billion in dollar reserves, Japan is one of the world’s largest creditors. Japan doesn’t need to print or borrow money. They simply make a withdrawal. As predicted last weekend, some of their money is coming home. And when large amounts of dollars are converted into yen, the yen goes up, the dollar goes down. Supply and demand.
Says The Nikkei [sub]: “Japanese investors held around $2 trillion in foreign assets, net of reserves, at the end of 2010. Speculators are betting a chunk of this will flow home as Japan begins to re-build and repair damage from the quake and ensuing tsunami, and insurance companies begin to pay out claims on life and property and casualty policies.”
“The yen bolted to all-time highs on speculation that Japanese insurers would be forced to bring money back home to settle huge quake-related damage claims,” writes Reuters. Before the disaster, a dollar bought around 82 yen, which already was seen as way too high. Now, a dollar buys only 78 yen, and we have seen spikes to 76.
The Japanese car industry is considered as not competitive if the dollar falls below the 85 yen mark. Moving production abroad helps to some degree. It shelters from the currency swings. Except when the books are closed. When overseas profits are counted, it makes a difference if a dollar converts to 76 yen instead of 86.
Maybe the Japanese central bank should seek the counsel of all the people who claimed that the yen had been manipulated and was artificially low. I bet tips on how to lower the price of the Japanese currency would be highly welcome.
The BOJ really needs to get on the other side of this trade and start selling yen for dollars.
Japan isn’t a debtor?
I don’t think Japan will have trouble paying for the rebuilding project, but saying that they are not a debtor country is patently false. Japan’s debt load was at 199% of its GDP at the beginning this year, and was predicted to reach almost 230% by the end of 2011 before the disaster.
I think Bertel meant external debt. If you do a little reserch, you would find out that only 1/8 of the debt is external. Unlike America, almost all Japanese bonds are bought by Japanese.
Agreed… Japan is one of the worst countries for debt. The people are fantastic, but if there was ever a model of monetary policy you wouldn’t want to do long term… it’s Japan and the lost 90’s that continue into today. Another country with decent currency that also is highly in debt is the UK. Won’t be long and we’ll be on that list if we continue down our current path. I feel that we in some way are responsible for Japan’s lost decade with our extravagant and horrible fiscal and monetary policies. :/
They are a creditor to the U.S. government.
In terms of Japanese debt, over 90% of it is denominated in yen, most of that is actually held by the Japanese government in the form of bonds. This is non-sovereign debt.
What the Japanese have done, and the US has recently emulated, is quantitative easing. Basically they issue government bonds, and the bonds are purchased by the government themselves (using money from a federal account that they make out of thin air). It keeps bond yields low so that private investors look to investing in the private markets rather than bonds. Its a ‘money printing’ monetary policy.
We have to take ‘debt’ into the context that governments have the power to print money (unless they are in the EU that is).
Japan will likely go through another round of QE, which will increase public debt, but again debt that they owe to themselves. QE has its risks, the biggest risk is inflation and weaken their currency (something that the Japanese don’t need to worry about since they are having troubles with deflaiton).
The biggest issue is the viability of the JGB (Japanese Government Bonds), too much of it can spark a loss of confidence and a mass selling of bonds that would increase Japan’s ability to borrow in the future. This is the real risk.
Until this situation with the nuclear reactor isn’t resolved we should see more volatility.
I think I’ve said before in the other article, but this spike in yen is short-term. Primarily due to the uncertainty associated with the fluid situation after the disaster. Obviously there is some repatriation of yen as Japanese companies seek liquidity to pay for damages.
The sudden spike however, is more due to speculation by carry-traders. Which borrow money in yen (due to low-interest rates and strong yen) and invest money in assets denominated in foreign currency.
However, we should see a weakening of the yen once the rebuilding effort starts, there will be a massive expansion of the JPY money supply as Japanese government injects the economy with rebuilding money. Which should be in the scale of the hundreds of billions of dollars. BoJ has already injected the banking system with 6 trillion yen today.
What is a question however is if the BoJ will intervene directly in the fx markets. The conversation that Yosano had with Obama this morning may indicate that. But its a double edged sword, a high yen keeps rebuilding costs low for the Japanese government, a weak yen helps Japanese companies that have been hit with the disaster.
Boy, do I wish you are right. I have some Euros and Dollars to be converted to JPY.
A central bank intervention usually is a short-term and costly fix. Last year, the BOJ wasted 2 trillion yen to stop the rise of the yen. And what good did it do?
You’re exactly right in that government forex intervention is a complete waste of money. There is very little long term durable gains to be made.
But in general we need to take a step back, and look at this not from the volatile situation we are in right now, and from a larger lens that looks beyond the next two quarters (which will see negative GDP in Japan) and rise in yen. Most investors are on hold until this nuclear disaster gets a definitive trajectory.
Longer term we know that there will be reconstruction. The question becomes not of ‘if’ the money supply will grow, but rather of ‘how much’. But, yes, Japan’s debt levels will raise, consumption taxes will raise as well, and austerity measures delayed. But we will see BoJ adopot QE like measures (there is no other way), and just as importantly US’ QE-II will be winding down at the same time. Meaning that the downward pressure on the dollar will be lifted as downward pressure on the yen is applied.
The real question is if Japanese politics are up to it, the DPJ is a mess, and there is no real leadership. But the Japanese have a history of rebuilding and reconciling in times of tragedy, destruction and rebuilding are built into their history and culture. The silver lining to this very dark cloud is that it may be the true impetus for the Japanese to finally tackle long standing problems and find uniformity in their fragmented politics. Dealing with the yen is just one part of this.
My decrepit feeble age-impaired memory informs me that in 1975 forking over one USA greenback resulted in 220 Yen tossed back.
My astonishingly vile inability to conceive “mathematically” has always bothered/impaired me.
Perhaps the time when I was playing with the car door handle while Mom was driving and was around 2 years old or so(she related in later life she was going around 35mph) and I fell out, landing upon my rather misshapen head………..and no medical care sought (a different era back then) perhaps the portion of the brain involved with “math” thinking was affected? Where’s “Fantastic Voyage” when needed?
Anyway………… the Old Disgruntled One does appreciate topics, comments, etc involving ,monetary topics and much but not ALL can be assimilated.
Not expecting the Herd to explain but feel free to maximize examples and/or use anecdotes, whatever but in no way do I want to impair the free-flow of writing or conversations.
Muchas gracias!!!!!!!!!!