Saturday, April 6, 2013

Japan's Yen Is In Play

The Yen is in play. “What Japan is doing is actually quite dangerous because they are doing it after 25 years of just simply accumulating deficits and not getting the economy going,” billionaire investor George Soros said in a recent interview from the sidelines of a conference in Hong Kong. Soros continued saying “So if what they are doing gets something started, they may not be able to stop it. If the yen starts to fall, which it has done, and people in Japan realize that it is liable to continue, and want to put their money abroad, then the fall may become like an avalanche,”

Chief currency strategist John Kicklighter at DailyFX said  in a note that there is no doubting that the scope of this effort is impressive. However, there is a disturbingly easy way it can fall apart on the BoJ – risk aversion. If equities and other richly-priced assets falter, the low yield of yen carry pairs will suffer. This is one of the reasons I again note "currency games have entered the danger zone". Central bankers have gone from managing money supplies and interest rates into the business of trying to create jobs, economies and demand, they are out of their element.

Soros also had a few ominous words for Europe a day after Mario Draghi President of the ECB opened a door to a rate cut in May as economists talked about a never-ending slowdown in the austerity-strangled euro-zone. “Japan is trying to escape after 25 years of slow death, from a policy that Europe has just now adopted. So they are moving in opposite directions. Japan is trying to escape and Europe is just starting,” Soros, founder and chairman of Soros Fund Management said.

A late update to this article. On May 22, 2013 it was announced that Japan just posted its tenth straight monthly trade deficit as a weaker yen increases the cost of imports more than it helps boost exports. In April, exports rose by 3.8% from a year earlier, while imports gained 9.4%. The deficit of  8.6 billion dollars in April was wider than many economists had forecast. Japan's goal of deliberately weakened the yen to make its goods cheaper abroad and boost demand also makes imports, such as energy, more pricey. The deficit is expected to shrink in coming months, as exports pick up more.

The danger some forget is that in our modern world money can cross a border with the press of a key on our computer. Money has gained wings, it can flee and move about with rapid speed, and it can leave destruction in its wake. The first whiff that confidence is fading might start this move. Some of the big  questions are, where will it go, and into what kind of asset. I have posted on this issue before, and I caution assuming the value of any asset be it paper representing stock in a company or gold that can be seized as quickly as money in a Cyprus bank.

Footnote; A previous article on this subject is below

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