When the nukes shut down Japan started imported a lot more oil etc. And their trade surplus started fading and yen became ‘easier to get’ internationally.

Meanwhile, conditional funding in the euro zone worked to take away the euro evaporation risk, while the austerity continued to make the euro ‘harder to get’.

And the US cliff is making the dollar ‘harder to get’ and about to get more so.

And Japan’s fx reserves keep marching higher indicating that somehow yen are being exchanged for dollars that Japan keeps at the Fed, and probably same with euro, as the euro zone has been encouraging foreign buying of euro. All making euro and dollars ‘harder to get’

The Fed’s growing portfolio continues to remove interest income from the global economy, making the dollar ‘harder to get’.

So if nothing else changes the yen goes down until net exports rise sufficiently.

Just like the euro goes up until that trade surplus goes away (or the euro zone goes away, which ever comes first, but that’s another story), and the dollar keeps fundamentally firming until fiscal relaxes.

Regarding the yen, however, a falling yen doesn’t necessarily cause trade to reverse. In fact, initially, the rising price of oil, for example, exacerbates the fall, as the quantity purchased doesn’t immediately fall. Nor does the drop in real wages immediately cause exports to rise.
This was called the J curve when I was in school back in the last century.

And not to forget Japan thinks a falling yen is a good thing.

So given all that, the J part could go a lot further than markets currently are discounting.

14 Responses

  1. Warren,

    I just looked at Felix Zulauf’s December blog posting, where he says:
    “…the fiat currency, paper currency standard, is in the final stage of the ‘super cycle.’ Fiat currency systems always collapse at the end. We are in that stage of the super cycle where things are accelerating.”

    Interestingly, on his November post he seems to be moderately positive about Japan: “…Some interesting changes are occurring in Japan. The Bank of Japan and the government have battled but are coming to a resolution. The government is introducing some reforms that the BoJ wanted, and the BoJ eventually will cooperate by weakening the yen. The root of the changes is the deterioration in Japan’s balance of payments, which will allow the Bank of Japan to weaken the currency more dramatically than otherwise would be the case. A weaker yen will help the Japanese economy and particularly export industries.”

    I’d love to know your thoughts about fiat currency systems “always” collapsing as well your opinion about a weaker yen helping the Japanese economy and export industries. Exports are costs, right?

      1. @RVMarkov,

        Thanks. I just re-read the “Seven Deadly Innocent Frauds of Economic Policy”.

        The only reason I read Zulauf is because his track record as a hedge fund manager is above average. Of course, being a good portfolio manager does not necessarily mean having a good understanding of the operational realities of modern fiat currency systems. I suspect Warren’s comment about governments coming to an end is right on the mark. The fiat currencies didn’t cause the governments (and thus the currencies) to fail — there were other key ingredients, like war, corruption, etc.

  2. “Meanwhile, conditional funding in the euro zone worked to take away the euro evaporation risk, while the austerity continued to make the euro ‘harder to get’.”

    “And the US cliff is making the dollar ‘harder to get’ and about to get more so.”

    Do you think that both units in this currency pair are likely to be more or less equally ‘harder to get’ or will one of them prove to be ‘harder to get’ than the other?

      1. @WARREN MOSLER, Warren, as far as i understand, if there is no deal on the cliff by year end then it will not yet have immediate consequences, but operations can be dragged forward for some time. How long (weeks/months?) do you think they can stretch it?

  3. Warren – Interesting piece on Tim Duy’s blog about a potential big shake-up with Japan. Specifically, a tighter integration of fiscal and monetary (potentially up to the point of lack of independence of the BoJ). I’d love to hear your thoughts on it.

    Reading some of Bernanke’s excerpts from his 2002 speech certainly makes it sound like he “gets it” more than I’ve probably given him credit for.

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