Japanese Yen And Its Implication For US Dollar29 July, 2011, 13:09. Posted by Zarathustra
Tags: Exchange Rate, Japanese Yen, US dollar
I am not at all surprised to see people, especially in Hong Kong, to believe that the downgrade of the United States and the possibility of continuous quantitative easing will make the US dollar worthless, such that it favours real assets (precious metals, real estate, etc).
What I am still surprised is how one can point to the fact that Japan has done multiple rounds of quantitative easing to justify their belief that the Federal Reserve will do the same (I accept that the Federal Reserve will at some point create more money), while at the same time believe that the US dollar will sink to the bottom even though the reality is that Japanese Yen has appreciated for 10 years despite 10 years of quantitative easing. As I pointed out a few weeks ago:
There is a very clear case that quantitative easing has done nothing as far as depreciating your currencies is concerned. Japan has started quantitative easing since early 2000s, and they have been doing so for more than a decade now, on-and-off. With a balance sheet recession that private sector was deleveraging, with slow credit growth, quantitative easing did not do a thing as far as reflating the Japanese economy is concerned. And most importantly, the Japanese Yen has been appreciating in value for more than a decade against the US dollar.
In fact, the Japanese Yen is so strong that not only has it been appreciating against the US dollar for more than a decade, in the past 3 years or so, the Pound Sterling has depreciated almost by half against the Japanese Yen since its peak; the Canadian Loonie has depreciated by more than 30% since its peak; the Australian dollar, despite its strength against the US dollar, is still more than 20% below its peak against the Japanese Yen; the Euro has lost almost 35% of its value against the Japanese Yen, and even the Swiss Franc (which seems to be treated as “safe” as gold) is now about 7% below its peak against the Japanese Yen. And despite its ballooning national debt, currently at more than 200% of its GDP (gross debt), it is still able to sell 10-year bonds at an outrageously low interest rate of 1.092%, while the yield of 10-year Greece government bond has a yield of 17.578%, Ireland at 14.037%, Portugal at 12.68%, Spain at 6.071%, and Italy at 5.757%.
With the recent flight to safety amid the lunatics in Washington taking hostage of the global economy, you can only expect the Japanese Yen to have gone even higher.
Japan is a country which has been easing monetary condition quantitatively on-and-off for 10 years and a gross government debt-to-GDP ratio of well above 200%, and its credit rating has been downgraded by multiple times by multiple rating agencies in the past multiple years.
AND YOU CALL JAPANESE YEN A SAFE HAVEN
Unfortunately, many folks are still floating the idea that US dollar (and so does any currencies which are pegged with the US dollar) will sink to the bottom while fail to explain that the only case of quantitative easing before the Lehmanesque financial crisis has failed disastrously in terms of depreciating the currency, which is Japanese Yen.