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« A Housing Bubble In Europe? | Main | Update on Exit Euro »
Wednesday
Sep202006

Talking up the Yen

Japan.jpgI actually had a bit of a laugh when I collected the articles for this post as some of the comments made by the finance ministers of the G-8 economies on the relationship between the Yen and especially the Euro was rather funny. The main point is that the Yen has not been so perky as many expected after Japan chose earlier this year to end ZIRP (zero-interest-policy). After all Japan finally managed to beat deflation which hailed the coming of a sustainable recovery ... right? I have argued otherwise on several occasions and particularly the BOJ's inability/reluctancec to raise rates has been an important factor in in my argument. Especially the recent revision of the inflation data (CPI index) was telling and does not provide any immediate impetus for the BOJ to contemplate a hike and with the ECB and the FED set on a long term task to mop up excess liquidity (at least this is the current -behind the headlines- narrative) the Yen has been taking a beating. So if the markets won't do what we want them to do then we need to tell them I guess ... and consequently this is what some are now trying to do.

(from the FT)

'Finance ministers from Europe and Japan have launched a co-ordinated effort to shore up the yen, voicing concern over the recent sharp decline in a move designed to stop the Japanese currency falling any further.

After a meeting of ministers and central bank governors of the G7 in Singapore at the weekend, Sadakazu Tanigaki, the Japanese finance minister said the yen’s value should reflect Japan’s economy, which is recovering, and added that the recent drop in yen had been a “little rough”.

Jean Claude Trichet, president of the European Central Bank, said: “We noted that [Japan] had exited its zero interest rate policy, that its recovery is now broad-based. We agreed that the yen will reflect these developments.”

The Financial Times understands that the comments were a co-ordinated move, reflecting concerns that the yen has fallen to record lows against the euro recently having dropped by more than 6 per cent this year and over 40 per cent since 2000.'

I am not exactly sure what they are trying to produce here. Especially the remarks from the ECB and Trichet seem odd as it is well known that the ECB remains 'vigilant' against inflation and thus are almost certain to continue raising. I think the ECB is talking with two toungues here and people must begin to consider the fact that the Japanese recovery, on which the Yen's aspirations hinges, perhaps are not as sustainable as initially assumed; there are certainly date to support this it should seem. So perhaps the Yen is just a victim of fundamentals? Well my choice of words here is not coincidental and as it is the fundamentals here are exactly what we are discussing ...

(from Bloomberg)

'The yen gained against the euro after Japanese Chief Cabinet Secretary Shinzo Abe said currencies should reflect economic fundamentals.

Japan's currency has dropped to a record versus the euro this quarter even as the Bank of Japan raised interest rates for the first time in six years, responding to the country's longest economic expansion since World War II. Abe, vying to become the next prime minister, was responding to questions about the statement issued Sept. 16 by the Group of Seven nations.'

(...)

Japan's economic recovery ``must be reflected in the exchange rate,'' German Finance Minister Peer Steinbrueck said Sept. 16. Japanese Finance Minister Sadakazu Tanigaki said the same day that the decline in the yen versus the euro had been ``a little rough.'''

There is a saying which holds that talk is cheap and I think it applies in this case ... I don't think we can talk ourselves out of this one in the long run as the economic situation of Japan becomes more clear.

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