The Japanese Yen Comes Under Pressure in 2012

by Wes Bridel on February 22, 2012

in Economic Updates

The currency war that has begun will certainly take its toll on the Japanese Yen in the near future.  It’s hard to say with certainty what effects will happen within a certain year, but Japan is without a doubt a major player in this war.  On Monday, we discussed the recession in Japan and today, we’ll focus on the bigger issue of the Japanese currency and government bonds themselves.

As we stated in the last post, Japan has been accumulating an incredible amount of debt over the last couple decades.  This is amazing when you consider that they have been a net exporter.  Actually, that’s the only reason the world has allowed them to accumulate a world record level of debt/GDP.  That and the fact that the Japanese people themselves are big savers and own most of that debt.

So what we’ve had is a people who save a high percentage of what they earn each year.   A people who produces quality products that the world uses each year.  It’s the recipe for a truly successful economy.  But what went wrong?  Well, as we’ve said, the government has tried to control the economy by borrowing and spending massive amounts of money to throw away by giving to insolvent institutions and spending on projects that aren’t needed.

The Yen has stayed extraordinarily strong because the world needs yen in order to buy all these fantastic Japanese products.  The Japanese interest rates have stayed low because the Japanese people are big savers and they buy up all the debt that the government is selling.

But both of these key characteristics are changing…

1)      The Japanese people are old (their baby boom happened a decade or two earlier than the US version).  They have begun spending that savings instead of adding to it.  This means that the world market will be needed to step in and buy the Japanese debt as they continue to roll it over and add to it.  The Japanese people themselves who have been holding the government debt up will be net sellers of this debt!

2)      Japan has recently become a net importer.  For decades, Japan has sold more products to the world than they have bought from the world.  This has made their currency very strong because people need the Yen, more than Japan needs other currencies.  However, this is no longer the case.  As Japanese firms move production offshore to find energy, and Japan imports massive amounts of resources to rebuild from the typhoon, Japan is now importing more than they export.  This means there is additional pressure on the Yen.

The world still views the Yen as a safe haven currency.  However, this will be changing because of the factors listed above.  And much like in the case of the US Dollar, Japan is actively trying to reduce the value of its currency by printing more in their version of QE every few months.

If the market ever decided the situation with the Yen is dire, it could get ugly very quickly.  However, it’s hard to say exactly what will happen or when because every country is firing shots in this currency war and it’s hard to know yet who has the biggest gun.  But there will certainly by a lot of bloodshed to go around.

Of course, as with any economic situation, there are always ways to profit from any scenario.  The prudent amongst you should have a defensive position that assumes tremendous currency risk to your home currency as well as tumult amongst those of the world.  Add to this the appropriate low risk speculations (or higher risk for those who can stomach it) and this could be a fantastic time to steward resources for those who are wise.

This is the 11th post in a series.  You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here.  Here are the rest of the posts:  3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & 8) European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash, & 12) War with Iran.

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