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Welcome to the Currency War, Part 9: What’s Wrong With These Pictures?

Japan’s currency devaluation has worked beautifully. The yen is plunging, Japanese stocks are soaring, and the current account surplus — the main measure of a country’s ability to trade effectively — is way up:

Japan Current-Account Surplus Climbs as Abenomics Sinks Yen
Japan’s current-account surplus rose in March to the highest level in a year as a depreciating yen boosted repatriated earnings and brightened the outlook for the nation’s exports. The excess in the widest measure of trade was 1.25 trillion yen ($12.4 billion), the Ministry of Finance said in Tokyo today. That exceeded the 1.22 trillion yen median estimate of 23 economists surveyed by Bloomberg News.

Prime Minister Shinzo Abe’s revamp of Japan’s central bank to focus on ending deflation paid off when the yen today slid past 101 for the first time since 2009, helping exporters such as Toyota Motor Corp. (7203), which now sees its highest annual profit in six years. Sustaining a current-account surplus may help to maintain confidence in the nation’s finances as Abe wrestles with a debt burden more than twice the size of the economy.

“The currency’s depreciation is buoying Japan’s income from overseas investment at a pretty solid pace,” said Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo. “A weaker yen provides support for Japanese exports.”

The dollar versus the yen over the past year:

Dollar yen may 2013

Here’s where it gets interesting: Measures like exchange rates and trade balances are relative, so Japan’s gains must by definition come at the expense of its trading partners. That is, the flip side of a weaker yen and rising Japanese trade surplus is a stronger dollar and deteriorating US trade balance. This hurts corporate profits, so to the extent that a cheaper currency and rising current account balance makes Japanese stocks go up, you’d expect US stocks to be doing the opposite. But that’s not the case; both stock markets are way up (S&P 500 blue, Japan’s Nikkei 225 green).

S&P vs Nikkei

What does this mean? Either currency exchange rates and trade flows no longer affect national economies, or they still do and US companies are looking at a sudden, sharp deterioration in their ability to sell abroad and compete at home.

This is consistent with the general currency war script: One country devalues, reaps some short-term rewards at the expense of its trading partners, who then retaliate by devaluing their currencies. Which means, probably, that the US and Europe are about to follow in Japan’s footsteps.

15 thoughts on "Welcome to the Currency War, Part 9: What’s Wrong With These Pictures?"

  1. Pingback: The Küle Library
  2. Well a currency war is most definitely underway as the Major World Currencies, DBV, and Emerging Market Currencies, CEW, are selling off, on the failue of Aggregate Credit, AGG, causing dereisking and delveraging out of Nation Investment, EFA, and Small Cap Nation Investment, IFSM.

    FT Alphaville chart article relates “Suddenly, a bad last day of May for the stock market.”
    I conclude relating The mother of all bears markets has started

  3. toyota says ever +1 yen/dollar move changes its profit $500m. someone has to pay for that. article is exactly right- its all zero sum.

  4. Does Abe know something we don’t? Evebn at ~1% interest, the vig on national debt now consumes 25% of the entire JG national budget….if they have to roll that debt into new paper at around 3%…..bam!…they have NO HUNDS LEFT after paying JGB interest payments, they will have to raise taxes and kill the economy, then increased default risk will raise bond interest further…. Kamikaze death spiral into their own ship….I don’t get it. How does Abe think he can tune interest rates below his target inflation rate?

  5. @John Rubino: Race to the bottom ? What a load of crap. There’s a MAJOR difference between “monetizing debt” and (literally) “printing money”. As long as Japan keeps monetizing debt then there’s no “chance in hell” (Hyper-)Inflation will occur. On the contrary, monetizing debt will only INCREASE the deflationary forces (much) more.

    I actually think that both the USD and Yen will go through the roof (against e.g. the Euro) in the coming weeks/months. And the USD going through the roof is actually THE sign the “world is goign to hell in a handbasket”.
    “Hyper-Inflation requires Hyper-Deflation”
    “Hyper-Inflation is a political choice”
    Robert Prechter & Hugh Hendry.

  6. Some random thoughts:

    The second chart shows the relative intensities of the two QE programs. Notice also that the rise in equity prices began not at the actual beginnings of the QEs but when they were announced.

    According to the Toyota dealerships where I live auto prices have not started to drop and none of the salesmen I spoke to have heard that they might. (Of course they had no idea what was happening to the yen either, or why that mattered here.) If the US distributors and dealerships decide to pocket the difference instead of passing on the savings to customers their profits will increase. However, foreign profits earned by multi-nationals will fall in dollar terms, and corporate profits are already about 70% above their norm, and corporate profits are notoriously cyclical about their mean.

    As of a few weeks ago I was as ready as I’ll ever be for things to start rolling over. But then my mother passed away and I inherited a non-trivial annuity that matures in May of 2016. For technical reasons the insurance company cannot, or will not, commute the payout, which means I can’t receive a fraction of it now. I have to wait until 2016 to receive it. So now I’m back in the same boat as most others – a chunk of change locked up in a financial institution hoping that it won’t be confiscated or inflated away. I have serious doubts that I’ll ever see it, but maybe things will hold together a lot longer than I think.

    The logical next step is for the ECB to join the debt monetization game, followed by the US upping its ante. But then I read this article: http://business.financialpost.com/2013/05/08/bankers-warn-fed-of-farmland-student-loan-bubbles-echoing-subprime/

    1. I’m sorry to hear you just lost your mom Bruce… my condolences on this Mother’s Day weekend especially.

    2. Dear Bruce, my condolences, I lost my own mother last october. It gets better. You will be happy again in the next year. Don’t worry about the money in the annuity. I have had a hard time accepting my mom’s inheritance, because it means I have to close out my last links to her.

  7. Garbage. Abenomics are destined to fail. I expect the USD/Yen to hit the high 50s or the low 60s.

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