Ralph Shell @ 2:17 PM, Tuesday October 05 2010
Perhaps the Bank of Japan officials should get together with Fed Chairman Bernanke for guidance how to weaken their yen. Concerned with deflation at home, and a strong yen hurting their exports and economic recovery, the Bank of Japan announced some new programs. The interest rate has been reduced to practically nothing, money is readily available to lend, and yes the BOJ is going to increase the money supply with a dose of quantitative easing.
The Japanese stock market responded positively, the Nikkei 225 gaining over 1.4%, setting the stage for some better markets in Europe and the US. Perhaps this is where Bernanke can help because do far the yen has remained firm. When Bernanke starts talking about QE 2, very shortly there after the USD goes down.
The Japanese have been trying to re-inflate their real estate bubble as well as stimulate their domestic economy for decades with monetary policy. Despite the failures, they are giving it another go, hoping to get different results with the same prescription. In doctrinaire Keynesian fashion the Japanese Government is spending massive amounts to offset the spending shortfall of the private sector. Government expenditures are now roughly twice the tax receipts. Obviously the money supply needs to be expanded so their gov can borrow lots of money to pay the deficit.
This plan does not seem a lot different than the heavy reliance of monetary measures currently employed in the US, but with different results. The USD's weakness is a thing of beauty to the Japanese, but why the different results?
Is it possible that the USD is sinking not because of Bernanke's skillful guidance, designed to purposely lower the USD, but rather because he has a misguided divine calling to inappropriately use monetary tools to fix a struggling economy. With corporations sitting on cash nest eggs worth a couple trillion, and banks flush with idle cash, do we really need to further pump up the money supply? If the business climate were better, the uncertainty of Washington's new regulations and mandates clarified, investment opportunities would arise.
For the past month, the USD has been the most popular sell among currency pairs, while the yen, despite a muddled domestic economic picture, has remained a safe haven. Market action today does not suggest anything has changed but George Soros in a speech at Columbia University today said:
“deficit reduction by a creditor country such as
Germany is in direct contradiction of the lessons learned from
the Great Depression of the 1930s,” the 80-year-old Soros said
in prepared remarks for a speech at Columbia University. When
both creditor and debtor countries reduce their deficits amid
high unemployment they “set in motion a deflationary spiral in
debtor countries. It is liable to push Europe into a period of
prolonged stagnation or worse.”
It is hard to assimilate all this and come up with a yen trade versus the USD. The pounding the USD has received is immense as the specs have accumulated large dollar short positions. So far they have the profits and no reason to cover. The yen got a boost on the 15th when the BOJ intervened and sold over $20B but that was not well received among the central bankers and accomplished little. Experts think it is doubtful the BOJ will try this again. We are resigned to being spectators in the yen waiting for developments.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.