Japan aims for major devaluation

Deflation.pngSome trends play out tactically in days or weeks. Others move more slowly over months and years. These tend to get ignored in the modern world of twitter and 24-hour news cycles. But then, as with the sub-prime collapse in 2008, the future suddenly meets the present.

We can see the same pattern underway with the Cycle of Deflation (above). Every year or so, events move it forward towards its eventual end-point. Thus “suddenly”, as it were, today’s talk is all about competitive devaluations and the risk of ‘beggar-my-neighbour’ policies.

The reason is that Japan has now woken up to the impact of the US Federal Reserve’s policy of ‘quantitative easing’ (QE) on its export business. As Barrons, the US investment magazine notes, the US “dollar is now down 17% against a broad range of currencies“. Plus, of course, as the blog has noted before, QE has also helped to drive global oil prices to record levels – helping to add to the US’s shale gas cost advantage.

The yen peaked against the US$ at ¥79 : $1 in November, and has lost value for 11 weeks since then. Clearly traders “suddenly” realised that the new Abe government would seek a major devaluation to support Japan’s major exporting companies. Now the deputy economy minister has confirmed the policy, suggesting an initial target of ¥100 : $1, and adding that he would be comfortable if it fell to ¥110 : $1.

This would be a 39% decline from the peak. And, of course, “suddenly” other major governments have now become worried. The head of the German Bundesbank has warned Japan’s approach is “heading into dangerous territory“, whilst China has warned of “currency wars“. In turn, the governor of the Bank of England warned that it is “hard to be optimistic about how easy it will be to manage the resulting tensions“.

As the blog first noted 4 years ago when highlighting this insight from Comstock Partners, the only long-term solution is for policy makers to accept that ‘capacity needs to be closed as fast as possible to avoid the menace of deflation’. Today, there still seems little willingness to bow to reality, and aim to rebalance supply in line with future demand.

Yet most companies still prefer to ignore the potential for protectionism and tariffs to move up on polcymakers’ agendas. They thus risk “suddenly” waking up one morning to confont the massive problems these will cause for their business.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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