The markets have flipped again.
Earlier in the year, the market was bullish on Japan as Prime Minister Shinzo Abe and the Japanese Central Bank launched their stimulus package, dubbed ‘Abenomics’. At the same time the market was nervous about a major slowdown in the Chinese economy and the impact on Australia.
Now it seems the Japanese economy is struggling, while China’s (arguably) is picking up. But Japan is the key market to watch when it comes to the future of the currency war…
Japan: The Early Warning Line?
Take this from the Australian Financial Review on Friday:
‘Mr Abe’s 11-month old administration has sought to re-energise Japan Inc after years of deflation and population declines reduced manufacturers’ incentive to expand at home. Thursday’s figures show companies have yet to respond in force, signalling bolder steps may be needed to cut regulation and give companies an incentive to deploy near-record stockpiles of cash…“Warning lights are flashing for Abenomics,” said Kiichi Murashima, chief economist at Citigroup in Tokyo. “With the absence of further weakening in the yen and a clear global recovery, Japan’s recovery is losing momentum.”’
Japan’s move to double the monetary base, or more simply the supply of yen, was the big shot of this year in the currency war. The yen is down almost 20% against the US dollar, a massive move for a major currency like the yen. It also sparked a rally in Japanese stocks at the beginning of the year.
But behind the rise in the share market is an ugly truth. Bloomberg reported last week that the share of Japanese households with no financial assets rose to a record figure since statistics began in 1963. Falling wages and incomes are forcing the Japanese to run down their savings just as a weaker currency and increased taxes hit at the same time.
Anyone on a fixed income in Japan is getting slaughtered. And there is no guarantee the Japanese Central Bank won’t attempt to drive the yen even lower to raise inflation. The whole Japanese standard of living will slowly rot away.
This is the misguided playbook of the central banks all over the world. They think liquidity can substitute for genuine structural reforms of the economy. So expect more of the same from Japan. And you can probably also expect more of the same from the US and Europe as well…
Central Banks and the War on the Savings Class
Inflationist central banks are on an all-out attack against deflation. The collateral damage they’re prepared to sacrifice are savers all over the world. That means you.
Take this report from Money Morning‘s sister pub The Five Minute Forecast:
‘Erik Townsend is a retired software entrepreneur turned commodities trader who has a weekly spot on Jim Puplava’s Financial Sense podcast. He attended a talk by [US Federal Reserve Chairman nominee] Yellen in San Francisco some time back.
‘”She was talking in her lecture,” he recalls, “about how if there was anything she could do to figure out a way to make interest rates negative, she would do that, because she feels that that’s what we need to do to make credit as easy as possible for the people. And I asked the obvious question that none of the San Francisco liberals were asking, which is, what about savers and investors? Doesn’t that punish them?
‘”And what she said didn’t surprise me that much. She said, well, we’re coming to the point where we have to consider the role of people who have significant savings and their responsibility in society, that it really is selfish to be hoarding it and that we need to create incentives through government for people to spend their savings, because that’s exactly what we need in order to rejuvenate the economy.”’
Remember, the current fear is the Fed will taper their bond purchases and pull the rug out from underneath the market in early 2014.
But the US economy is neither hitting the Fed’s inflation or unemployment target. So it’s perfectly possible for the Fed to increase QE. That’s the more likely scenario according to currency expert Jim Rickards. His analysis leads him to believe the Fed wants to hit 4% inflation. This is essentially to force American consumers into spending their depreciating dollars and unleash the multiplier effect to produce growth.
We’re sure Jim will have plenty more insight for us when he hits town next year for the Port Phillip Publishing conference World War D. He’ll be joined by the star of the last conference in 2012, Satyajit Das, bestselling author John Robb and another genuine investing A-lister who we’re keeping under wraps for now. You can get on the early bird list here to get access to a discount with no obligation. It will all take place here in Melbourne.
If Yellen and the Fed do increase QE, pressure will come on the US dollar again. As currency moves are a zero sum game, that would mean a stronger euro. That won’t be a pleasant outcome for the European central bank, with the euro already trading over US$1.30. You probably know the ECB surprised the market when it cut the cash rate earlier this month.
Over at The Denning Report, Dan Denning has been studying the shifts in global capital. He suspects the ECB will step into the market in 2014 using the same playbook Japan and the US have turned to. He calls it the next shot in the currency war.
Dan’s got some ideas on how you might capitalise on these developments. You can check out his latest research here. The currency war will be battled out for years to come. It’s just a question of who makes the next move. Stay tuned.
Callum Newman+
Editor, Money Weekend
PS. Hey, just a reminder for you to put your name down on the advance list for the World War D conference. It’s in Melbourne on March 31 and April 1. There’s no obligation to attend, but by being on the advance list you’ll qualify for special early bird pricing. Go here to put your name on the list now.
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