Ref: 2011-02-PO of March 15, 2011 Click here for Free PDF Download ScribD
Quake in Japan, Tremors in America
Nature is Supreme:
Nature is the most powerful force dawned upon the universe by almighty God. If humans were to control everything, no one would have ever believed in God. When something wrong is perpetrated over the years, it ultimately gets corrected by the almighty force of nature with glaring violence with a warning and stern reminder “Do not fiddle with me, did you get that?”
In the wake of severe quake followed by Tsunami in Japan, the humanity was served with this violent reminder again. The illiterate people learn the message quickly, but the educated class – so called Investors, speculators, hedge fund managers, pension fund controllers, derivative players – does not learn easily and quickly. The nature has therefore reserved the massive shock – CRASH – in whatever the educated class practice day by day, year by year, decades by decades and centuries by centuries.
Have you heard the word “Crash” from the illiterate class – ever? No. But ask the educated illiterates or Elite Class – they will recall every crash of 1929, 1987, oil shocks of 1980s, crash of commodities, oil prices crash to $ 9 per barrels, crash of 2003 and crash of 2008 – all in financial markets with the paper and electronic money created by humans to utter defiance of the disciplinary money of God – Gold.
When Japan was not listening to the nature that low interest rates and weaker yen was harmful to its economy for almost 16 years, the Supreme Power assumed the command. It engineered the massive crash in the form of major earthquake of 8.9 scale followed by huge Tsunami that wiped out almost entire north east coastal cities of Japan in less than few minutes. What was built over 66 years since World War II was destroyed in less than 6 minutes. That’s the nature – the Supreme Lord.
Japan – Making money in hard goods, loose in Paper trading
When the Japan was creating fabulous products, everyone admired, including God. HE must be carrying Giant LCD or HD TV to micro TV, gadgets, mobile phones! Just kidding. But when HE saw that the Japanese were blindfolded by its love for dollar, not God, HE was perturbed. HE tried to teach the Japanese with subtle warnings by causing its NIKKEI crash from 37000 to currently 11,000 (before Tsunami), and not allowing its economy to prosper for 16 years. However, the Japanese did not understand nor did they heed the warnings.
Japan was exporting huge physical inventories to United States, UK, Europe and rest of the world in fierce competition, not in terms of price, but in terms of extra ordinary quality. However, what it earned was kept in Dollar reserve with the United States by deliberately keeping its currency artificially low. Japanese governments in almost every succession went on printing more and more Yen to buy dollar to keep its own currency weak. United States mused. It never objected to Japanese keeping its currency low but went on lecturing China to allow its currency strengthen when both countries were following almost identical policies.
The nature could not prolong the obvious wrong. It finally struck, caused severest quake on record in Japanese history, and sank almost every asset that was used to build the massive reserve in dollars. When the humans do not heed the warnings, the nature acts, and IT DOES ACT with severest punishment. But even then, the humans do not learn.
When the disaster struck, the natural course for Japanese was to withdraw the dollar and convert into yen. After all, its reserve – a kind of savings – has to be used one day for eventual use in calamity. But the Japanese did not use. They pumped into money market 15 trillion yen created out of thin air (not by selling dollars) which is equal to US$ 183 billion. And what happened – the NIKKEI dropped further by 14% in single day! On following day, it pumped in another 8 trillion yen (almost $93 billions) again out of thin air into the financial markets, that is, the paper market.
Almost 23 trillion Yen went up in smoke in just two days.
When the need of the hour for the Japanese government was to rush massive physical aid to affected people and area under destruction, it went on engaging itself into unprecedented money market operation or in paper and intangible markets with massive force without any conviction.
According to CIA latest figures, Japan today has massive public debt of 197% to its GDP. In the aftermath of quake, its GDP is likely to go down by 30% and its public debt (with 25 trillion yen printed by budget deficits) will rise by 25% that will worsen its Public Debt to GDP ratio to over 353% – in less than 9 months. (Existing Public Debt + 25% of new PD divided by new GDP (Current GDP – 30% deceleration) %.
With massive 25 trillion injected into the system, the specter of inflation will rise very fast. The inflation in Japan will be almost uncontrollable. With huge short supply in daily essentials such as water, electricity and food accompanied by umpteen supplies of additional Yen created out of thin air, Japanese government has played a gamble of lifetime in casino type of operation. In all probability, this gamble is not going to work. With massive political instability, uncertain economy and now the humongous debt with destruction, we do not know how many years the Japan will be thrown back. It will recede into 5th or 6th largest economy after the effects of the dire game is played out in full.
True that Japanese are the most industrious people in the world. But what can they possibly do when their policy makers are running with the speed of Boeing 787 in wrong directions?
The Supreme Nature will reassert itself. It is possible that –
- Japan will have to sell massive amount of US Dollar reserve in favor of its own currency – Yen. It needs more yen at home than dollar overseas. What is the use of savings if it cannot be used even during the days of extreme necessities?
- As result, it is possible that Yen will eventually rise with outflux of dollar and influx of yen into the monetary system in Japan
- Whether BOJ pumps in more money or not, it is inevitable that the Japanese Yen will rise from current 82Y/$ to almost 60Y/$ in less than 18 months at the most. There is a strong urge for money to revisit home from overseas, and this will be done very fast whether to the liking of Japanese politicians and businesses or not. Home-coming of Yen will be the biggest development in FOREX market in more than 60 years.
- The journey from 82Y to 60Y will not be easy one to start with. Initially, with growth figures of Japan revised down followed by rating downgrade by S&P, Moody and Fitch credit rating agencies, some hedge funds will short the Yen knowing fully well that Japanese government will love their actions. The Yen might show some initial weakness right up to 86.8 levels at the most, after which it may résumé its upward journey stopping at 81, 78, 75 and 71. Once it surpasses the 69Y threshold, it may move to 65, 63.50 and eventually 61 level. There could be concerted actions from G7 nations at the instance of Japan’s request, but such actions cannot stop the rise for long time.
- Those who short the Yen presuming lower GDP growth or excessive printing of yen by BOJ will be simply butchered later on.
- Those overseas workers working in Japan and getting their salary or other income in Yen should preserve their savings before remitting the amount to their own country in panic. In this authors’ personal opinion, any weakness in Japanese Yen to 86Y or about will be entry point for taking position in Yen. Those who sell Yen in panic may feel hurt later for loss of profits.
- Japanese insurers will have no alternative but to sell its overseas assets like stocks, bonds, and treasuries and bring the money back home to meet the insurance claims. These insurers do not have luxury to print the Yen on their back yard. They are private corporations, not government entities who can print the Yen at random out of thin air.
Unless the Japanese Monetary Authority and Bank of Japan adopt another imprudent step to pump in trillions of yen into the money market without selling its dollar reserve.
- Japanese growth will be knocked off in big punch. It will be a sufficient cause for foreign investors to shun the NIKKEI and invest less in Japan for at least 2 years.
- Interest rates may rise in Japan which has been kept at artificially low level for a long time. There will be a dearth of capital, so new capital will come at a cost, not free as before.
- Japan will be absent at all future treasury auctions in United States. Or its scale of activity will be substantially cut down. When one major creditor Japan stays away from the participation, there will be rise in effective interest rates in United States. Watch out the LIBOR – it may give first indication of movement in interest rates in United States.
- If Japan and its businesses/insurers/banks are obliged to sell the dollars, and buy Yen for use in resurrecting manufacturing plants in Japan, US dollar index (paper trading) and physical dollar itself will come under severe and continuous selling pressure. Gold and silver may gain steadily with faster pace than ever before (barring short term downward prices caused in wrong conception).
- The countries exporting food items such as Australia, Canada, USA, China and other nations will gain from their exports if they are not facing foodstuff related inflation and did not ban exports.
- There is a wrong conception that the Japanese manufacturers will lose their production advantage. They will make it up by producing more in cheaper overseas plants. Therefore, the countries housing Japanese manufacturers will witness substantial increase in exports from their countries. China, Malaysia and Indonesia will be the biggest gainers in exports. Their respective currency may gain too as result.
- With Yen rising, the profitability of Japanese conglomerates will decline in Yen terms but in dollar terms they may not lose advantage due to rise in Yen value. It is possible that some Japanese companies will start preparing their final accounts in US dollar terms rather than their own currency to window dress it better.
- Those who contracted debt or contracted “Yen Carry trades” by borrowing in Yen or swapping into their ultimate currency to fund their own requirements will suffer huge losses because their debt in real terms will rise anywhere between 10% and 25% depending on the level of Japanese Yen appreciation versus currency of destination. For instance, a bank like ICICI in India, who contracted Japanese Yen debt equivalent to $ 1 billion of loans or Commercial Borrowings in recent past, will find its profitability shrinking to the extent of Yen appreciation versus Indian Rupees.
- The derivative markets which was mainly involved in “Carry Trades against Yen” and in non deliverable forwards, will find themselves losing humongous amount. There could be total collapse of derivative market when the Yen starts strengthening and interest rates in Japan ticking higher from near zero level. Those Yen borrowers for swap transactions will suffer from higher Yan and higher effective interest rates on Yen.
Tremors in America
There will be more consequences. Most worried persons will be Bernanke and Geithner (and Obama himself) because none of their high profile visit is going to work in their favor this time. They can’t bring even moral pressure on Japan not to sell the treasury or buy more of them in future auctions. Their day of inevitable will be nearer than before. When Japan starts selling treasury, Chinese are not going to sit behind and watch their value shrinking right before their eyes – they have even greater stake after all. Based on the cardinal investment rule “ If you can’t fight them, better join them” the Chinese will be forced to join the Japanese in selling treasury dollar game. US dollar is going to be vulnerable in future. Give or take 4 to 6 months, and you will have heavily losing US dollar in the Forex game.
All in all, the currency market is going to witness the massive upheavals. The major beneficiaries will be Aussie dollar and Canadian dollars. Minor beneficiaries will be Brazil Real and South African Rand. Controlled currencies of China and India may not rise much in spite of higher exports for obvious reasons. They have surplus food stuff to export to Japan; secondly, they are least affected by inflation due to stronger currency and economy, and finally they are benefitted by higher hard and soft commodities. Aussie dollar might rise to 1.20 and Loony (Canadian Dollar) may rise to 0.88 to 0.92
It is amazing that the Japanese leadership is engaged into paper trading exercise when it should focus on real tangible asset exchange and development.
They have still not understood that it has been adopting deliberate “weak yen’ policy right from 142Y to current 82Y in last 16 years with disastrous result. If it has amassed US dollar reserve of about $900 billion, it has in real sense lost nearly $300 billion in Forex losses, if you take average rate of 120Y. That is, they shorted or sold Yen at average price of 120 and now can get back only 82 or 2/3rd of what they sold. That is, they lost 1/3rd of $900 billion or cool $ 300 billion in Forex losses.
Japanese Government will learn it hard way that “Selling Yen and Buying US Dollar is injurious to Japanese Wealth” and by the time it realizes the truth, it will be too late.
Anil Selarka (also known as Kalidas)
Hong Kong Camp: USA
March 15, 2011 – Ref: 2011-02-PO
©2011 by Anil Selarka (Kalidas) All Rights reserved by the Author