Tuesday, September 14, 2010


A super quick snapshot (who can do more than that at 12:49 AM in the morning?) on the impact that our Japanese Central Bankers are having as they intervene in the currency markets.  Essentially they are attempting to force the Yen down because the strength of their currency is hurting their companies as they try to export to world countries.  Since our (the world's) currencies are worth less it takes more of our currency to buy their products.  In the world of global competition, this is a no-no.  No one wants a strong currency, just ask the Chinese - they have artificially weakened theirs for years in an attempt to dump their junk on us and keep the prices low.

As I stated many times, ALL of the central bankers will join the race to zero interest rates and keep the "growth of the economy going".  When their policy tools have been exhausted, they sometimes rely on the mechanism to attempt to spur asset price increases by attempting to drop the value of their currency.   In stating this, I made the prediction that we'd see some (several) major currency devaluations this year.  The Japanese are doing their best to get in the game.

As of now, here are a couple of screen shots of my favorite site to check on the status of the Nikkei when I can't sleep, or am about to drift off into a pleasant dream.  If you want a real time Nikkei update this is a good site - http://e.nikkei.com/e/fr/marketlive.aspx

So, what is the result of all this intervention?  Well, just as we see here in the USA when the central bank makes efforts to devalue the currency, the stock markets lift off in a celebration!  But like most parties, the happy times usually don't stay that way.  Back when I used to drink I used to have a saying that you needed to leave a party "At the top of the hill".  That usually meant that when I was having the best time it was a signal that I needed to leave.   Unfortunately we've seen that central bankers have no concept of leaving before the party is overdone.  Their history of blowing bubbles and pushing easy money and lax credit on undeserving consumers is well documented.  Why would we expect the Japanese that have tried these measures many times to be successful now?  While the party may continue for a brief time, this should set us on alert for a new rise in the yen (after it drops for a couple of weeks) and for a new fit of competitive devaluations from central bankers all around the world.  We can't let the Japanese have all the fun can we?

If you own Toyota (TM) and you get a nice pop on the move perhaps you should consider leaving while your at the top of the hill.

Who gets hurt in this?  Well, first off, any trader around the world that was long (held) yen.  The drop in value of the yen could really damage a trader's account especially since most traders use leverage (borrowed money) to create out sized gains (and losses).  Second, a Japanese citizen that is looking to purchase goods from outside the country can now buy less of that good with the same amount of yen.  Finally, if this could somehow actually create inflation in Japan (it won't) then holders of those awesome Japanese bonds that yield 1% interest each year could see the value of their bonds clobbered.  Now it is important to note this isn't an official devaluation like we've seen from some of the emerging markets countries, but the impact is clearly focused at intervening to drive down the value of the yen.

Be careful.