As I’ve been saying all along, competitive currency devaluations will soon become the order of the day. See article below and my commentary — Larry
Bank of Japan Must Devalue Yen
The Bank of Japan has already tried most tricks to alleviate the global financial crisis. In an effort to combat the worst economic slump since 1974, it appears the next obvious solution would be to devalue the yen and boost the drastically ailing export industry. The yen rose 24% against the dollar in 2008, and this has severely hindered the profit margins of Japanese companies including Honda, Toyota and Sony. If rates continue to stay above 100 yen/$ many of these large multinationals may move portions of their operations overseas to cut costs.
My Opinion: If the Bank of Japan wants to ensure the future economic viability of the corporate entities operating out of Japan, they will have to intervene in currency markets and suppress the strengthening yen in an attempt to boost its once burgeoning export market. Companies like Honda see an 18 billion yen fall in operating profit for every yen rise against the dollar. While Honda may have more currency risk exposure due to 70% of its operating income coming from North America, this is not a problem unique to Honda or the automobile industry. Corporate giants like Sony and Pioneer are also announcing layoffs and other cost-cutting measures to reduce losses.
Japan has a robust and versatile export market. It is renowned the world over for producing quality goods and must capitalize on this goodwill.
Related posts:
- Japan Ready for Round 4 The Japanese government is preparing additional stimulus measures to the amount of up to 30 trillion yen to boost their ailing...
- End of Carry Trade a Positive Sign for Japanese Exporters? http://www.bloomberg.com/apps/news?pid=20601110&sid=a.6u.EHUlfm8 My Opinion: With interest rates at rock bottom levels across the world and asset levels plummeting to record...
- G7 softens stance on China The Group of Seven industrialized nations have adopted a more conciliatory tone against China’s handling of its currency. At...
{ 10 comments… read them below or add one }
Re your 2/19 Money & Mkts and the soon devaluation of the USD, what currencies will stand to benefit most? Thanks for your carefully thought-out analyses and data-based opinions!
Larry Edelson Reply:
February 24th, 2009 at 3:58 pm
Thank you! Gold, the ultimate currency, will perform best, followed by the Swiss franc.
Hi Larry, I’m a long time reader of your blog from Japan and really enjoy reading your materials. I agree with a lot of your trading strategies and the way how you think about gold and oil.
It’s not surprising to see that the yen must drop soon. Right now, it’s about 93 which is considered extremely abnormal. Usually, it’s between 110 and 125 in normal economic times.
But I’m a bit confused with the USD Index….Jack writes in his blog that the Dollar will rise but you’re saying it’s going down. I’m thinking the USD will fall with all the new bonds coming entering the market in the near future. That means the price of oil will rise too.
I’m too busy trying to find who’s right…..
hero
Larry Edelson Reply:
February 24th, 2009 at 4:00 pm
It’s merely a timing issue. My longer-term view is the dollar is headed much lower. Short-term, it is vulnerable to upside panic moves.
It’s maybe not the best place to leave a comment on your contribution to M&M on Q&A, but I could not find another spot to do so.
My question would be the following:
The crisis of course started out when it was found out that the banks, and the likes, had inflated the amount of money in the world (in computers) and could not repay each other. It was even unsure who owed who and how much. It must say it was a kind of clever idea to export this (now) almost worthless paper to countries outside the US. A perfect scheme of aid to a country that did not need it.
Anyway we have lived in the past years with the idea that there was much more money around (at least in computers), but we could perfectly live with it. Why is it then that there is so much worry about depreciation if a tiny fraction of this amount of money is now lifted from out of the computers and printed instead?
Thanks for your answer.
Larry Edelson Reply:
February 24th, 2009 at 4:02 pm
Gert, not sure I understand your question. If you mean why are investors worried if the electronic money is converted to printed money? You’re right, it doesn’t matter. It’s the overall supply of money and credit that matters and we are now witnessing the most massive creation of money in the history of mankind, making each piece of paper or electronic credit worth even less.
Hi Larry,
Just wanted to say thanks for your fabulous article on the world water plight that I received this morning. Thank God someone is prepared to get out there and connect the issues that we are facing in money with an even more precious commodity water. For virtually all of the last few months this critical issue has gone off the agenda whilst everyone worries about finances. I live in Adelaide - South Australia and we are having a similar situation to what you describe is occuring in California. Financial packages have to include money for water projects and we are just not seeing it here either.
Thanks again and well done - Don
Larry Edelson Reply:
March 6th, 2009 at 2:02 pm
Thank you Don, and your welcome!
So when’s this going to happen? 1000 Yen used to cost £5 - it’s now £7.5 and I’m going on holiday there early April 2009. It’s going to cost me an arm and a leg!
Larry Edelson Reply:
March 19th, 2009 at 3:47 pm
If I knew exactly when it’s going to happen, I’d be getting ready to retire!