September 15, 2010

Japan Inc. vs the Speculators

Here we have a classic matchup.
A Sovereign bank vs market speculators. If you recall the classic match up of the early 1990's (Market led by George Soros vs Bank of England)

The UK's prime minister and cabinet members tried vehemently to prop up a sinking pound and withdrawal from the monetary system the country had joined two years prior was the last resort. Prime Minister Major raised interest rates from 10 to 12 percent, then to 15, and he authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets however the measures failed to prevent the pound falling lower than its minimum level in the ERM.

The Treasury took the decision to defend Sterling's position, believing that to devalue would be to promote inflation.[5] On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 19:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent (however, on the next day interest rate was back on 10%). It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine and Home Secretary Kenneth Clarke (the latter three all being strong pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15 percent had only been a temporary measure to prevent a rout in the pound that afternoon.

the Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after they were unable to keep sterling above its agreed lower limit. George Soros, the most high profile of the currency market investors, made over US$1 billion profit by short selling sterling.
Source Wikipedia

By contrast, Todays matchup is altogether different. Speculators are buying Yen as a safe haven currency as they regard the BOJ's lack of will to print yen, and it's position as the second largest investable economy (China is not there yet) as the only credible safe haven from dollar and euro risks. So there is no end game, just a parking spot.

Given Japan's deflationary domestic economy and it's fundamental need to export to survive, BOJ should be printing with reckless abandon. Building up foreign reserves would not be inflationary, and it would give Japan some global clout to defend against an economic collapse of it's own.

Unlike, Black Wednesday, the speculators have no capitulation trigger to press on.
Additionally, the is nothing to stop Japan's MOF from printing ad nauseam.

Sempre Fiat!


"Cassandra" said...

Nice observation. There is reasonable cause to believe the tails are not symmetrical on this one - in the direction you suggest.

...of course, China, Korea and other competitors will be none too happy with your latin catch-phrase. Keynes foresaw that The Winner's Curse be borne stoically, rather than fought tooth-and-nail. mercantile interests, however, pressure otherwise.

Their immediate question to your epiphany might be: what to buy - more USDs (they have close to trillion already)? AUD? CAD? Gold? Crude? BRL, KRW? SGD? etc. Perhaps its doesn't matter at all...

The trade will look great on paper when (and if) fears subside, though historically, the Japanese have shown little desire to lighten-up and trade-out even when things move the other way decidedly in their favour, , and specs provide more-than-a-reasonable exit.

Richard B said...

I agree that the BOJ should be printing Yen like mad now - they really have no other practicable choice to fund Government expenditure - an expenditure which up til now has been crucial in staving off a sharp deflationary depression.
The dynamics of the aging population is rapidly changing the debt market from being a net source of government funding to a drain, taxation to fill the gap would simply make matters worse.

I feel that people looking at the US as the primary source of the heavy currency debasement that will be needed (to fight the debt supercycle collapse)are looking in the wrong direction - first Japan, the China, then Europe, then the UK and then the US

Richard B