Why the strength in the Yen
- Thread starter bond_trad3r
- Start date
deflationary? :eek:
I was thinking the situation more closely resembled a war torn country where shortages and demand for imported goods increases, whilst policy makers spend more and print more - i.e the opposite, INFLATIONARY!
I suppose you've got to laugh at how different people can end up drawing completely different conclusions...
I have to admit that you're argument sounds perfectly valid at first glance. I'm trying to find a flaw in it... (head scratching...)But I think this discussion got a little more interesting.
Since we can look back in a year's time and see who was right, who was wrong, what do others think?
Achilles28, Great Comment! I'm putting it in my notebook. This is why the public company economy (C-Corp) in the U.S. has diverged from the private corp economy (S-Corp)...the private corp economy (aka "main street") relies on asset based lending without access to the public markets; primarily real estate collateral based lending for the lowest cost source of debt collateral...and of course their real estate assets have been devalued and the leverage ratios applied for new debt have been reduced...so, S&P 500 trades up and main street shows vacant store fronts. Same will happen in Japan.
Another explanation of why the USD strengthened after the credit/housing crunch is that the US current account deficit shrunk due to less demand for imported goods
But is it necessarily true that the Japan current account surplus will increase as a result of this disaster?? I'm thinking of greater demand for imported oil, nat gas, steel, copper, foodstuffs if radiation gets into the water, depletes the fish/rice stocks..
What do others think?
But is it necessarily true that the Japan current account surplus will increase as a result of this disaster?? I'm thinking of greater demand for imported oil, nat gas, steel, copper, foodstuffs if radiation gets into the water, depletes the fish/rice stocks..
What do others think?
Quote from benwm:
deflationary? :eek:
I was thinking the situation more closely resembled a war torn country where shortages and demand for imported goods increases, whilst policy makers spend more and print more - i.e the opposite, INFLATIONARY!
I suppose you've got to laugh at how different people can end up drawing completely different conclusions...
But I think this discussion got a little more interesting.
Since we can look back in a year's time and see who was right, who was wrong, what do others think?
Based purely on the USD/JPY cross that I've been watching closely, achilles appears to be correct at the moment. But what you're saying makes sense as well. Perhaps what we will see is credit destruction due to the natural disaster, followed by credit creation due to the BOJ pumping liquidity.
So in short, watch for a bearish USD/JPY followed by a bullish USD/JPY at some point in the medium term (when, exactly, is anyone's guess). I wouldn't recommend putting any positions on based on such a theory but it is food for thought.
The deflation argument that achilles made doesn't sit all that well with me. Firstly, it disregards the carry aspect. Secondly, it only makes sense if one assumes that credit growth is ultimately non-productive. Thirdly, there's the all-important question of horizons. If we're talking about the credit expansion dynamic that takes years, if not decades, I am not sure how it will affect my investment decisions.
In general, I personally find it very hard to have a strong view on yen, so I stay flat. If I could buy some cheap long-dated JPY puts I would, but I'm not sure I'd pick USDJPY. My Z$2c.
In general, I personally find it very hard to have a strong view on yen, so I stay flat. If I could buy some cheap long-dated JPY puts I would, but I'm not sure I'd pick USDJPY. My Z$2c.
Kassz007, you made an important prognostication:
"credit destruction due to the natural disaster, followed by credit creation due to the BOJ pumping liquidity."
Following what I have been suggesting about the role of credit formation in the process of inflation and deflation and the comment by Achilles28 above...it makes sense that when there is aggregate asset value destruction by economic or geological event, that credit would contract and contracting credit is deflationary in the sense that it results in lower prices measured by price index measures. You suggest that the BOJ would respond by increasing liquidity...because rates are close to Zero in Japan, I suppose you mean they will increase the money supply...by purchasing bonds and other long term financial assets, or purchasing those assets directly from the MOF.
In the U.S. this is QE...and it has not resulted in inflation in the U.S. because the money supply increase and the interest rate reduction has no transmission mechanism where credit is already contracting...so the money supply increase goes to excess reserve and inflation impulse is exported to emerging world where credit is expanding. In Japan, credit is also contracting, and previous attempts to inflate have been unsuccessful for same reason as stated here about the U.S. Japan has excess reserves and a 'lost decade' to show for its quantitative easing and Keynesian fiscal stimulus efforts in the face of contracting credit.
However, the lesson of money supply and interest rate manipulation being impotent to inflate (in the sense that inflation is increased bank lending, leverage, and is measured by price change index increase) is that the reverse of credit contraction requires a fiscal driver not a monetary driver. In the U.S. there has been no fiscal driver to create incentives to borrow, to create a promise of future profit opportunity greater than the average weighted cost of capital. In the U.S. the opposite is true, the fiscal context discourages credit formation...and so we stay stuck.
In Japan, in response to geological disaster, that may not necessarily be the case. The impulse to rebuild and the need to replace infrastructure assets may drive aggregated private credit expansion, in which case the liquidity supplied by the BOJ would increase inflation. Much will depend on the fiscal reaction in Japan with regard to taxation as entrepreneurs, individuals who make the private decision to invest in reconstruction assets, must believe that that their net operating return after tax will be significantly greater than their cost of capital on a risk adjusted basis in order to borrow money to build new assets. I think this fiscal context, necessity being the mother of invention, is more likely to arise quickly in Japan than it is in the U.S. or in Europe
"credit destruction due to the natural disaster, followed by credit creation due to the BOJ pumping liquidity."
Following what I have been suggesting about the role of credit formation in the process of inflation and deflation and the comment by Achilles28 above...it makes sense that when there is aggregate asset value destruction by economic or geological event, that credit would contract and contracting credit is deflationary in the sense that it results in lower prices measured by price index measures. You suggest that the BOJ would respond by increasing liquidity...because rates are close to Zero in Japan, I suppose you mean they will increase the money supply...by purchasing bonds and other long term financial assets, or purchasing those assets directly from the MOF.
In the U.S. this is QE...and it has not resulted in inflation in the U.S. because the money supply increase and the interest rate reduction has no transmission mechanism where credit is already contracting...so the money supply increase goes to excess reserve and inflation impulse is exported to emerging world where credit is expanding. In Japan, credit is also contracting, and previous attempts to inflate have been unsuccessful for same reason as stated here about the U.S. Japan has excess reserves and a 'lost decade' to show for its quantitative easing and Keynesian fiscal stimulus efforts in the face of contracting credit.
However, the lesson of money supply and interest rate manipulation being impotent to inflate (in the sense that inflation is increased bank lending, leverage, and is measured by price change index increase) is that the reverse of credit contraction requires a fiscal driver not a monetary driver. In the U.S. there has been no fiscal driver to create incentives to borrow, to create a promise of future profit opportunity greater than the average weighted cost of capital. In the U.S. the opposite is true, the fiscal context discourages credit formation...and so we stay stuck.
In Japan, in response to geological disaster, that may not necessarily be the case. The impulse to rebuild and the need to replace infrastructure assets may drive aggregated private credit expansion, in which case the liquidity supplied by the BOJ would increase inflation. Much will depend on the fiscal reaction in Japan with regard to taxation as entrepreneurs, individuals who make the private decision to invest in reconstruction assets, must believe that that their net operating return after tax will be significantly greater than their cost of capital on a risk adjusted basis in order to borrow money to build new assets. I think this fiscal context, necessity being the mother of invention, is more likely to arise quickly in Japan than it is in the U.S. or in Europe