Hail to the Yen!

Anyone who knows me knows I like an argument. Call me a tease, provocative, a dick, etc, but nothing gives me more pleasure than challenging myself. Gets me thinking, and it gives me more motivation to write. So today I had a good discussion with Ken at www.gaijinpot.com/bb/showthread.php?t=49871. We are discussing the merits of buying foreclosed property in Japan.

Ken said: I expect the USD to stay weak during 2008 but rise again in 2009. I don't see the J-government/US government letting the yen go through the roof against the USD like it did in late 1990's. Bottom line: the USD is the generally the stronger currency.

Andrew said: The US 'has' been the stronger currency, but that need not been the case in the future. Its not an arbitrary principle. The reason why the USD was strong was because the economy was growing, and all that debt was performing well for Americans. But asset prices are in reverse. Which means the cost of living has to rise whilst debt is liquidated. Its a double-whammy to restore monetary equilibrium. Why should the USD strengthen? Of course it will as a short term trade. Sure there will be interest rate increases, but they will lag inflation.

Ken said: Because it's not going to crash all that much against the yen. The yen is still over 100 yen to the USD. The J-government does NOT want the USD to fall below 100 long term and will resort to currency manipulation as it has done many times in the past if need be.

Andrew said: I think the problem with those arguments is that they are old. The paradigm has changed. Spending will fall off alot in the USD, so there is no point being competitive in the USA. Asian currencies are rising, and the Euro, this is where the Japanese exporters will be making more money, not to mention the Middle East, Russia and other commodity producing countries. Japan has been shifting increasing capacity offshore anyway, so only high value production retained in Japan. Japan is almost at a point where it is a holding company like Britain, with most low-value product manufacturing is located offshore.

On your last point, it was easy for BoJ to manipulate the currency when the US economy was strong. But not its not, the carry trade is being unwound. Where will Yen go? Sinking USD, sinking US assets? Nope. Some will go into metal commodities, some into agriculture (in USA & elsewhere), some into commodity markets, but most will go home, afterall Japan is the world’s third largest economy. So Japan starts to look quite good! Weak exports, but some sound basis for domestic demand. Its a more compelling story with reform, but looks ok.

Japan will copy Korea - nice irony dont you think

Ken said: The fact is the J-government does not like a strong yen.

Andrew said: Well they didn’t like a strong Yen for the sake of exporters. But like I said, that 'mercantilist policy' has had its day. In the next few years you will see that change. You will see Japan shift to a strong Yen policy, and I suggest there will have to be a policy of economic austerity measures to make Japan more competitive. I think the fact that Korea is taking that path is actually likely to lead Japan to take a similar tact.

Ken said: Old or not the fact is the J-government prefers a strong USD to the J-yen.

Andrew said: Ken, are you 44yo, or born in 1944, because you're being a headstrong traditionalist mate. It might be time to give up the 70s disco scene and embrace the kabuki. Yen will take the lead.

The debate continues…..www.gaijinpot.com/bb/showthread.php?t=49871.
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Andrew Sheldon www.sheldonthinks.com

Outlook for the USD-JPY

This chart highlights the long term decline in the USD as a result of currency debasement. They all do it, though the US is worse than any other country. Why? Because the USD is the base currency, that is the the currency in which most debt is priced, and most commodities are sold. This is a powerful position because it means that the USA has the power to debase its currency, yet still repay its debt in its own currency. So if the USA is debasing its currency it has a huge credibility problem.
You might ask - Who would care? Well you might think the Japanese, Chinese and Arab governments who are accumulating large amounts of US debt. But no - that is not apparent. We dont see alot of complaining from those quarters. The reason is that they see opportunity where others see problems. The opportunity is:
1. Higher interest rates in the USA
2. Reform of this poorly structured monetary system
3. Continued economic prosperity in the interim, which they profit from, whether its sales of Chinese & Japanese exports, or purchases of Arab oil.
In this last chart we can see that the USd-JPY has stabilised in the 100-130 Yen range. Currently the USD is trading at 107 yen, and I believe it will return to 100 yen, last reached in 2005. Once again the fall in the USD is being orchestrated by a decline in the Fed Reserve interest rate. At that point, there is really two ways for the government (likely a Democrat govt) can address its issues:
1. Increase interest rates and taxation
2. Print USD to repay all those foreign holders of US treasury notes, or some combination of these 2 options.
3. Reform the economy
The US is already one of the most vibrant economies in the world by virtue of the US values system and its dynamic, free-thinking people. But government works in mysterious ways. We have already made the point that the USA benefits from the current monetary system. But I suspect the US might be willing to debase its currency to get Japan and China (and Asia for that matter) to legitimately price their currencies. At some point, these countries will have a large portion of their savings in US treasuries.
I wanted to provide this forecast of the outlook for the USD-JPY for the sake of property investors in Japan. Refer to my report on Japanese Foreclosed Property 2008.
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Andrew Sheldon www.sheldonthinks.com