Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the Yen Should Become Stronger, Not Weaker, Japan Government Faces Debt Crisis

Currencies / Japanese Yen Mar 17, 2011 - 09:18 AM GMT

By: ECR_Research

Currencies

Renate van Ginderen writes: Japan’s Economics Minister Kaoru Yosano stressed that damage from last week's devastating earth quake and tsunami to the country's economy would be limited. However, what he did not mention was that the adverse effects from damaged nuclear plants are likely to be much bigger.


Additionally, Yosano stressed that he does not think that stock and currency markets are in a state of turmoil. This is a rather strange proclamation, given the stock market’s reaction to escalation of the nuclear problems with the Fukushime nuclear plant. Monday’s fall in the NIKKEI was over 10%; something not seen since the Lehman bankruptcy. Financial markets seem to believe the impact on the Japanese economy will be much bigger than as stated by Yosano.

Another peculiar event was the steep rise of the Yen vis-à-vis the American dollar within 30 minutes of trading, as presumably large Japanese financial institutions repatriate Japanese overseas assets, causing a large increase in the demand for Yen. The Ministry of Finance is watching the situation and will order the Bank of Japan to intervene, should the currency become too strong. In the past, the USD/JPY limit was 80. Anything below this level was crucial and thought to hurt Japanese (car) exporters too much.

However, there might be an important incentive for the Japanese central bank to intervene only if USD/JPY reaches even lower levels than 80, even as at these levels exporters are hurt already. Since a current lack of (nuclear) energy has and will - at least temporarily - disrupt parts of many supply chains, it is likely that Japan is not able to export much the coming months anyway. On the other hand, a strong yen in the coming few months would not be such a disaster for the rest of the economy. Japan is completely dependent on oil imports, as it has no own oil supplies. Now that a large part of the nuclear plants is damaged, whereas before the disaster Japan relied for over 30% of its energy consumption on nuclear energy, imports of oil or seaborne coal have to compensate a resulting energy shortfall. Given that the prices of these two commodities have risen rapidly in the past few months, a strong yen makes importing energy less expensive. Therefore, the advantages of a strong currency will weigh heavier than the disadvantages.

The advantages of a strong yen grow with increasing unrest in the Middle-East and when fears of disruption to the supply of oil - most notably in Saudi Arabia - become reality. In other words: the higher the price of oil (and other energy sources imported by Japan), the more Japan profits from a stronger Yen.

Notwithstanding the enormous toll the earthquake and tsunami take on human life and the damage done to buildings and infrastructure, rebuilding efforts starting shortly after the disaster should provide an economic boost. In this respect, the earthquake, tsunami and problems with nuclear plants should on average not hurt the economy. However, given that the government will take on a large part of the losses, any additional spending will imply a greater public deficit and debt. With a public gross debt that will be reaching perhaps even 220% of Japan’s GDP at the end of FY 2011, fiscal stimuli add to the burden. Declining government tax revenues from both firms and households worsen the problem further.

Many analysts have written that a larger debt does not automatically mean that government finances will run out of control. Given that 95% of public debt is in the hands of Japanese residents and its central bank, and given that the private sector has a large pool of savings left in the form of deposits and cash, Japanese government bond yields are not destined to rise within short due to a lack of capital to fund the deficit and rolling-over of old debt.

Nonetheless, the government’s debt was financed increasingly short-term over the past few years, and from the private sector the savings rate of households is already in negative territory and as the population ages, consumers are drawing down on their pool of savings. Additionally, firms will have to rely in the short term more on the built-up reserves to cover the costs from the current disaster.

To conclude, over the coming months less capital will be available to fund a growing public deficit. This is not automatically or necessarily problematic in the short run, but the problem is that nobody know exactly how large private savings are and to what extent the private sector will draw on reserves rather than invest in Japanese government bonds. For now, the Bank of Japan has proven willing to invest about 3 trillion yen more in JGBs than previously indicated, so this will stave off any capital shortfall. Importantly, there will be a point in time at which private sector savings are not sufficient and/or are not transferred into government bonds, and the Bank of Japan has truly reached its limit regarding monetization of public debt. Until this point, government bond yields will stay low. However, past this point, foreign investors have to be persuaded to invest in JGBs and at that moment, yields will quickly rise to historically high levels. The result is a sovereign debt crisis in the 3rd-largest world economy.

By Renate van Ginderen

After having finished a bachelor in International Economics and Finance and International Business at Tilburg University, and a short experience of studying abroad (at Université de Lausanne), I went back to Tilburg University to complete a Master in International Economics and Finance with an average grade of 8 (out of 10). After a six-month internship with ECR Research, I started as a full-time analyst financial markets. Research topics include China and Japan. ECR Research is an independent macroeconomic and financial research company specialised in interest rates and currency rates forecasts.

ECR Research (www.ecrresearch.com) is one of Europe’s leading independent macroeconomic research institutes focusing on the main currency and interest rate markets. The ECR reports reach a worldwide audience of sophisticated investors and treasurers and CFO’s within corporations and financial institutions. ECR offers a wide range of research products which are online accessible and updated on a weekly basis.

© 2011 Copyright ECR Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in