Thursday, April 4, 2013

96 JPY

And we have Kyle Bass again.
I wrote about him earlier.
But this time, we have Gross and Soros chiming in with him.

5 year USD/ JPY
The weakening of the Yen from 78 odd to 96 is a 23% depreciation in about 5-6 months.
And  " The Bank of Japan yesterday boosted its stimulus program, saying it will double the monetary base within two years. "

We are clearly in uncharted territory now with even the BoJ joining the global devaluation party, the concern is, as Bass points out, a lot of things, demographically, are against Japan. Furthermore, the big danger is that unlike the US, Japan might lose control of the devaluation ship. 

Japan will increase its USD treasury purchases and Japan's domestic investors might start finding ways to invest abroad because a 0.5% 10 year yield in a deflationary economy is relatively so much better than a 0.5% yield in a potentially inflationary (more due to devaluation) economy.

Hayman Capital's view is the USD @ 118 odd JPY by next year (2014), but he went on to say that if the BoJ lose control, it can go further north (south) of there.

If I were to chime in now, I would say that I am definitely concerned.
Soros said that “If what they’re doing gets something started, they may not be able to stop it,” 
He called it a potential avalanche.

The biggest problem with market behaviour is the inexplicable behaviour of its participants. Globally, there is an yield glut and if we have a host of hedge funds bear down on the Yen - unlike 1992 when Soros was quite the lone crusader against the BoE (BGP) - we could very well have an uncontrollable avalanche.
But, to take a 5 year view, is it really that bad? Japan would regain its export competitiveness and there could be a resurgence in the economy. Will the people change their attitude from pessimism towards optimism, after 20+ years of deflation? Could the South Koreans face competitiveness issues because of a weaker yen?
And the big question is, would the carry trade become massive again? Is that a good thing?

The BoJ wants the Yen to weaken
Global traders would be happy to see it weaken
Japanese companies with global operations would be happy to see it weaken (Toyota, Mitsu, Sony, Canon)
The people would hate it weakening, because they will suffer on their JGB portfolios - but then, would they move out of that and into equities? Or gold? Or under the mattress? Surely, it seems, that they will start an exodus out of JGBs (an idea by Bass here). But, if they move into US treasuries, does that mean that the Fed need not buy as much as it is right now?

Hmmm... We live in very interesting times.

This is the problem with incremental changes - they are barely noticed in the long run.
While the world slept, the Nikkei is up 45% in the last 6 months.

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