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