Tuesday, August 11, 2009

The sad truth about the Japanese yen

Since the beginning of the global credit crisis, financial markets are accustomed to consider the yen as a safe asset, buying it as a liquid hedging instrument, together with the United States government bonds (and Swiss franc), but the situation has changed. We approach the second anniversary of the start of the credit crisis, we are not only beginning to make sure that the worst seems to have passed, and gradually forget about the problems associated with the yen. At this very time two years ago, the dollar / yen traded at 118.00, which is 20% above the current rate. If you reflect on the value of other financial assets, especially in comparison to past levels, the current rate of the yen did not seem so very strange. Thus, S & P 500, for example, then was in 1467, which is 40% higher than now. Gold cost $ 670 per ounce. Compared with them, even the yen may be severely underestimated, but faces look closely. To evaluate the systemic financial risks, we expect the index as the index of financial stress GS (GS-FSI). After a slow but sure growth in early summer, the index began to decline markedly, approximately coincided with the emergence of problems with cash funds, then rvanul up against the backdrop of the collapse of Lehman fall. To our delight, the index is again reduced to the levels recorded in May 2007. This shows that thanks to the decisive actions of the authorities, was able to reduce systemic risks. If so, why yen strengthened?

This issue becomes even more relevant against the backdrop of the fact that some fundamental factors that are important for the yen, much worse in the crisis. The latest report on the trade balance in the United States showed that the trade deficit between the U.S. and Japan in May fell to 1.9 billion dollars. This is the lowest level since February 1984. This month, the dollar / yen, by the way, trading in the range of Y232-Y235. Most of the time course of the dollar / deutsche mark, and then, consequently, the dollar / euro, reflects the "financial mood", while the dollar / yen has been motivated by trade flows. If the situation has not changed, the yen did not place at current levels. Go even deeper. In Japan, there are no more surpluses of current account and trade balance. Moreover, the sharp decline in exports during the crisis led to several critical months. Thanks to the restoration of world trade, the country's finances back into a slight positive, but the dynamics of the past has disappeared. If excluded from the calculation of trading positions on the road sector, during the past 18 months in Japan, there is a deficit of 0 to 2% of GDP. Taking into account the ability of Japanese automakers to move production closer to markets, we can assume that the current rate of the yen, they did so. (In China for the Chinese market in the UK for Europe, and so on). If this trend would develop, an advantage that allowed Japan to maintain the overall balance of trade surplus quickly evaporated.

If you look to the structure of the balance of payments of Japan, a culture of savings and, of course, the fiscal dynamics, all will become clear. In the mid and late 1990's, it was considered that the yen should be drastically reduced. However, the arguments given in support of the allegations ahead of time for 10 years. Those who closely followed the balance of payments of Japan, strongly questioned the adequacy of this opinion. Perhaps now is the time to revive it. Such praises savings rate in Japan has steadily decreased and is now less than 2%, while quick to credit the household refuse to the U.S. raised its up to 4.6%. Yes, it is pure truth. According to the latest data, American households save more than the Japanese. All the Japanese have savings invested in financial instruments. High U.S. government. bonds, assets denominated in Brazilian Real and the Turkish lira - this is the modern sons of the Land of the Rising Sun. In this regard, a steady outflow of funds in the overall portfolio of stocks and bonds, but in Japan there deftsit balance of payments in the broad sense (taking into account the combination of current account, net foreign direct investment and portfolio capital flows). Over the past 12 months, a deficit of 6% of GDP in Japan, more than 2 times higher than in the United States. So, whether we have chosen the United States and Britain as the principal debtors? We estimate that next year's ratio of debt to GDP in Japan may exceed 200%, more than two times more than in any other developed country. Now that the savings rate is lower than in the United States, the country will have to think about raising capital. And then where the Japanese government wants to see the yen? At Y195 or Y95?


Jim O 'Neil, the chief economist of Goldman Sachs,
From The Financial Times

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