A Yen for a Weaker Currency Revisited

Two years ago the Brazilian Finance Minister, Guido Mantega, used the term “currency wars” to describe the series of competitive devaluations adopted by rich nations to bolster their exports amid the global slowdown to the detriment of emerging market nations.

Since then Brazil, along with India, Mexico and a host of other countries have actively sought to depreciate their currencies, to make their exports more competitive, in an effort to fend off the “inadvertent devaluations” by the US, the UK and the EU via their QE and LTRO policies, which are effectively efforts to stimulate inflation by debauching their currencies whilst attempting to manipulate interest rates.

The financial newswires have been relatively quite about the aforementioned, but are now abuzz with comment on “currency wars,” thanks to the weakness of the Japanese Yen. Since September of last year, the Yen has slumped by 21% as can be seen below.

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Our blog of the 25th September 2012 commented that “whereas QE and a rafter of other stimulus measures had failed to reverse Japan’s debt deflation, as evidenced by its long term stock market and economy weakness, a break-down in a correlation between the Yen and Japanese consumption had occurred, suggesting that consumption will rise further, leading to a substantially weaker Yen.”

Whilst the “great and the good,” whether it be at the Davos crowd fest of a short while back, or at the G7 gathering of this week, are berating the Japanese authorities for manipulating their currency, our stance, now and as stated in September was,” for a preference to study the collective social mood of any society, by way of the local stock index, perhaps the best barometer of just how they are feeling.” The Japanese people were ready to spend more, save less and in doing so, remove a major prop for the ridiculously low Japanese bond yields and therefore interest rates.

However, our views are insignificant relative to policymakers and hence the rhetoric increases in respect of “currency wars.”

French President, François Hollande, added his two penneth this week, when he called for a weaker euro and urged the euro zone to set a mid-term target for its exchange rate, which isn’t likely to go down well at next week’s G20 meeting in Moscow.

Currency wars are nothing new, they have been going on for centuries and they just escalate during times of financial distress. One only has to look at the US 1929 stock-market crash, which ushered in the 1930s global depression.

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Unfortunately, however, they often lead to trade wars, which compound the problems of slower growth, extending downturns and if not careful, lead onto hot wars.

We commenced with an observation from a Brazilian, so let’s end with one.

The last time there was a series of competitive devaluations … it ended in world war two,” said Brazilian President – elect Rousseff in 2010”

Let’s hope that he is wrong, although a student of history would note that, “the players may change but the play basically remains the same.

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One response to this post.

  1. […] did within the 14th February 2013 blog, “A Yen for a Weaker Currency,” which showed the close correlation between the Yen and the Japan’s stock index, the Nikkei Dow […]

    Reply

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