The reversal of a 220% appreciation of the Yen has begun – Tokyo has enough of the concerted competitive devaluation by its trading partners.
By Christian Takushi MA UZH, 5 April 2013.
After tolerating a 220% appreciation of the Yen that inflicted tremendous pain, the Japanese are reversing it. Get ready for 125 Yen/USD and more pressure on Eurozone markets.
In 1985 Western Nations forced a brutal appreciation on the Japanese Yen. The Yen-value in USD terms went from 0.4/100 in 1985 to 1.3/100 in 2012! Japan had to absorve a shocking 220% appreciation of their currency vs the USD. For 25 years Western & Asian competitors forced Japan to accept the appreciation of its currency. While everybody else pursued exclusively national interests, Japan bowed for the sake of global harmony. Would the USA, UK or Germany tolerate a concerted appreciation of their currency by 200% ?
After devaluing their currencies aggressively vs the Yen for decades, Japan’s trading partners are blaming Japan for starting a Competitive Devaluaton and Global Currency War. That seems not only unfair, but cynical. Look at the exchange rates! The moves were absolutely brutal and against Japan…
Currency Exchange in 1985 and 2012
Yen/USD : 250 => 78 Yen appreciated by 220% vs USD
Won/Yen : 28 => 7 Yen appreciated by 304% vs Korean Won
Millions of Japanese had misery and stagnation, because their currency was collectively appreciated for so long – in the eyes of many Japanese the world has been in a currency war against them since 1985. Competitive Devaluation against the Yen has been practiced recklessly for decades by the US, Europe and some Asian nations and they should not criticize the BOJ for trying to reverse this now. After giving lessons in public about the “incapacity” of Japanese officials, Western policy makers and bankers sit in a liquidity trap of their own, with high unemployment. Japan has seized the initiative and taken Western & Asian policy makers by surprise with unprecedented bold monetary-fiscal-regulatory measures. After bowing to foreign pressure for decades we see the first Japanese govt that puts national interests first.
Where should the Yen be? Many macro economists believe Concerted Devaluations started in the 1980’s. As I’ve been saying in recent years the Yen could go to 125-130 to the USD to correct the excessive appreciation after the Plaza Accord. More expensive imports of food, energy and raw materials and fiscal spending will drive the Yen lower to at least 110. The capital flight will be augmented by a down-grade of Japan’s “safe haven” status, pushing the Yen towards 125. With an aggressive growth-strategy the BOJ has won market credibility and put other Central Banks (ECB, BOK etc) under pressure. This has implications for the Swiss National Bank, and longer term the Franc may become the only “safe haven” left.
To avoid a massive pressure on Eurozone Markets, the ECB may be forced to follow any Japanese Quantitative Easing with their own massive Money Printing Program. The Korean Central Bank is likely to be under pressure to follow suit.
Christian Takushi MA UZH, Macro Economist (Asia – Emerging Markets)
Important Note: No comment should be taken as an investment recommendation