Japan: All Talk, No Action on Levitating Yen

The yen reached a 15 year high overnight as the Japanese Finance minister’s efforts to talk the currency down appear to have backfired. From MarketWatch:

Strong words against a strong yen from Japanese Finance Minister Yoshihiko Noda failed to prevent the Japanese unit from rising to fresh multiyear highs….

Noda said that recent currency moves are clearly one-sided and that disorderly moves can be harmful to economic stability, according to reports.

But Noda declined to comment on currency-market intervention, which some investors clearly took as a sign that Japan wasn’t ready to back up strong words with direct market action….

Despite Noda’s strong words against yen strength, the yen hit a 9-year high against the euro /quotes/comstock/21o!x:seurjpy (EURYEN 106.6800, -0.9600, -0.8919%) of ¥106.35 on the EBS trading platform, and a 15-year high against the dollar /quotes/comstock/21o!x:susdjpy (USDYEN 84.4400, -0.6700, -0.7872%) of ¥84.24.

The Nikkei and the currency typically move in opposite directions, and today was no exception, with that average declining 1.3%. Other markets show a shift away from risk, with the FTSE and CAC down over 1% and the DAX .89% lower. S&P 500 future are down over 8 points and bonds are rallying.

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  1. anvILL

    The Japanese government doesn’t want to use their foreign reserves to intervene because if they did, their “kuchisaki-kainyu” (talk intervention) would not be as effective any more.
    Even if they did intervene, I don’t think they would be able to reverse the trend.
    And I think more people are starting to think like myself.

  2. Arty

    a. Not yet needed. Japan main export structure is designed to withstand Yen all the way up to 80 at least based on last spike. We’ll have to see if Japan still have record export balance. I suspect they will.

    a. Japan main import for domestic consumption is metal ore and oil. Little more deflation wouldn’t kill I suppose. stretch that saving that much more.

    a. They really can’t do much. A Dollar is a lousy investment, and china is angry at them for breaking word from last administration and being punished by having high yen.

    Overall, I suspect Japan will sit tight and hope their export machine that is design to withstand currency shock actually work.

    This is a rehash of the 90’s for them, except they are now much more prepared.

  3. Joseppi

    Japan – More prepared?
    I suspect Japan is in dire straights drifting between the US, which Japan began eviscerating the US manufacturing sector with a cheap currency exporting cheap goods the US consumer couldn’t resist and now can’t afford, while importing little for it’s salary slave workers who bought all of Japans debt until recently. Japan perfected ZIRP while at the same time hoarding dollars and suppressing the value of the Yen – And on the other side is China and the future. China knows the game and is now buying Japan’s debt, which strengthens the Yen and gives China power in the value of the Yen to keep it from falling too much, which will maintain China’s trade advantage for the time being.
    Currency reserves do matter in the present currency regime and China knows it..

  4. Skepticus Maximus

    Here’s the thing I don’t understand:

    Why doesn’t Japan just print like crazy? I’m not advocating this, I’m just wondering what are the counter-arguments.

    Historically, Japan did do QE, but not in a sort of hesitant, two steps forward one step back kind of way. My assumption was that this was because, as a nation of savers, flooding the system with yen would destroy people’s savings (Weimer-lite). But the Japanese population is winding down its savings rate as they age. So the issue of destroying people’s savings might be less important.

    Like I said, I’m not advocating they do this. I think there are other measures they should be pursuing for making their economy more efficient and flexible. But they’re not implementing those measures either. They just seem to be on a train speeding along to a rendezvous with a brick wall, and mostly just talking about changing course.

    At some point, when you’ve got a mountain of debt and you’re not doing anything to pay it off, you’re probably going to default. And if you have a sovereign currency, the easiest way to default seems to be to print.


    1. charles 2

      Japanese debt is owned essentially by the Japanese boomers and their parents (people live long in Japan). They have an upper hand in the democratic process because of :
      1) their number : the age pyramid in Japan gets inverted, so you have many old voters ;
      2) their political clout : retirees tend to go back to the countryside, where there are a majority because there are no jobs opportunities there. As the electoral system over-represents rural districts, it makes them stronger nationally.
      The cherry on the cake is the bureaucratic apparatus, especially the Ministry of Finance, which consistently support the interest of the moneyed class.

      As a consequence, any attempt of “euthanasia of the (old) rentier” is fended off with ease. As a consequence, bondholders really enjoyed a good life in the last two decades of deflation : high real returns and low taxes (when the CPI goes down, one makes a taxless real profit on the cash holdings).
      The losers are the Gen-Xer and below. They effectively became indentured slaves of their parents through the payment of interest on Government debt.

      Don’t believe that Japan is unique for this : the same demographic and political forces are at play in all major developed countries (US, Italy, France, Germanny,…), with a 15 years lag. It is the strongest tailwind for deflation.

      What is probably more specific to Japan is the low capacity of the youngest generation to revolt and topple this financial system. For linguistic and cultural reasons, they are less likely to emigrate to avoid the debt burden. This is why it lasts for so long in Japan.

      For countries like, say, Ireland or Bulgaria, the demise will be much faster because young people will just leave. The region that is most at risk of “tearing the contract” is certainly Europe, because the “rentier/indentured laborer” relationhip operates at an international level, or sometimes at a regional level in states where the national sentiment is not very strong (Belgium, Italy and Spain come to mind).

  5. Joseppi

    Why doesn’t Japan just print like crazy?

    It did and it’s called the Yen carry trade. Japanese banks loaned billions to foreign banks who created the real estate bubbles all around the world.

  6. Justin

    I disagree that the Japanese are more prepared. As it stands, the economy has removed much of the inefficiency through the last 20 years. People in Japan use 50% of the resources that Americans do to accomplish the same task. However, they simply do not have the same natural resources as China, the US, Brazil, Russia.

    The concept in the game of go is sente, the power to force your opponent to react to your moves, instead of the other way around. Japan governmental monetary policy has lost sente.

    Everything you can say that ails America, ails Japan, and it looks even worse in a 10-20 year timeline.

  7. William

    Come to think of it, the asian borrowing explosion that lead to ’98 debt crisis also happens after japan ZIRP. (BOJ drop sub 1% in ’96)

    This is now what I am thinking outloud: current US ZIRP policy isn’t all that potent, because part of US market already had access to Japan’s ZIRP/carry trade.

    My question now: a) who will buy US T-bond in the next 2-3 years beside Federal reserve, specially after larger Asian bond market coming online. In japan the public and bank bought the bond for a long period of time because it pays rather well as a source of fix income. In US case, we are talking about $1.4T each year for next 4-5 years. That’s half the planet available credit.

    b) what is the effect of USD currency debasement in 3-5 years term?

    Overall, what will be the effect of US ZIRP to the global economy?

  8. ChrisPacific

    “Strong words against a strong yen from Japanese Finance Minister Yoshihiko Noda failed to prevent the Japanese unit from rising to fresh multiyear highs….”

    Maybe he should try happy thoughts and a pinch of fairy dust.

  9. Gareth

    After decades of defying deflation while the rest of the world boomed, it sure looks to me like Japan is about to finally roll over Fisher’s tipping point, with a big yen deflationary black-hole on the other side.

    As Kyle bass points out Japan has reached a “keynesian end-point” with falling demographics and savings and weakening export earnings. Lower rates will only exacerbate this strain on aging savers!

  10. mannfm11

    Japan is terminal. Their government is borrowing all the yen available and more. This is attracting money to buy yen to lend to the government. They are in an internal liquidity trap.

    CNBC had an interview with Kyle Bass. If you haven’t seen it, Denninger posted it on his site. Bass says they are cooked. The people have had their bank accounts sucked dry, there is no savings and the government is running a 9% of GDP deficit. This means they are borrowing more money than there is available.

    Bass says that debgt is 1 quadrillion yen, government income is 40 trillion yen, same as 1985 and spending is 93 trillion. A 1% move in their bond rates wipes out 25% of their base income. This is terminal deflation and a very bright picture of why Krugman and Stiglitz are wrong.

    There is a paradox of savings and debt. The more savings, the more debt, as they are mirror images of each other. Throw in a condition where bank credit is extended for capital purposes and you get the deflation trap. If Japan had been a South American country it would have collapsed a long time ago, but it is Japan. Ditto the USA.

    The USA has gotten away with what they have done because the dollar is a trade unit and the basis of monetary collateral around the world. The dollar finances credit around the world and now that we have ZIRP, there is no natural expansion of monetary base. It can only come from more credit, what the private sector in the USA can’t create any more. As this progresses, the policies of the USA look more and more like Japan. Bernanke and Obama are running the entire world economy off a cliff, by attempting to stimulate what can’t be stimulated any longer. We are headed for depression, like it or not.

    Should the Japanese bond holders take a haircut, it will destroy the savings base in Japan. No class or country can continue to pile up credits against their people and other countries and the game go on long. The world needs to see around the central bank game and come up with a new set of monetary theories. For one, government guarantees and lenders of last resort only seem to eventually make the problem so large that nothing can be done, once the end of the rope is reached. Losing money has to be accepted as a way of life. I doubt people would quit inventing things, making investments, etc., if risk was allowed to redistribute bad business decisions. When profit can only come from lending money that can’t be paid back, then profit becomes zero.

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