Quite the contrary, Japan today is a very wealthy nation with one of the highest standard of livings in the world today with GDP/Capita at $30,000 USD. The quality of life is excellent with an average life expectancy of 81.6 years. As the largest creditor nation on the planet lending the world over $2.4 trillion USD and growing with continued massive current account surpluses running at over $100 billion USD/year, Japan will remain an economic powerhouse. In the roaring Japanese bubble economy of the late 1980’s, Japan Inc. was buying real estate abroad including the United States with properties like Pebble Beach Golf, Rockefeller Centre in New York. Flush with cash, Japanese citizens were travelling the world fine dining in Paris amongst other expensive places. By the late 1980’s, the speculative Japanese stock and real estate market peaked and accordingly crashed in the early 1990’s. Consequently, this massive malinvestment of Japanese capital will take years to correct as this process is well underway with mild deflation in the domestic price level and stalled GDP growth rates.
Japan today is currently the second most technically powerful and richest in the world behind the United States. Japan’s accumulated wealth is staggering for this population of 127 million which by in all part still remains a closed society with very few foreigners. A depression for Japan is very different to a depression in other countries. In 2001-03 Argentina, a depression was severely impacting society where the economic and social climate was that of a state of complete disarray with poverty rampant in many areas. Conversely, the mild depression that has grasped Japan for the last 14 years has not impacted the quality of life as Japan enjoys superb public services to infrastructure. Japan today is lively, vibrant, the people are financially wealthy, the nation is culturally sound with a strong family unit the key to its success. The economy has now matured and stabilized with low to slightly negative GDP growth and inflation rates after rampant growth in the 1960’s which averaged 10 percent annually. The decade of the 1970’s saw real GDP growth average 5 percent per year while the 1980’s experienced a robust 4 percent annual GDP growth. Japan during the 1990’s reached maturity as GDP growth averaged only 1 percent due to massive government spending programs equivalent to over $1 trillion USD on new bridges, hi-tech parking lots, dams, tunnels, sports arenas, railways & airports amongst many other projects.
Surprisingly, the collapse of the asset bubble in the late 1980’s has not devestated the yen. Quite the opposite, the yen continued to strengthen when it reached a peak valuation versus the US-dollar (USD) in year 1995 at 79 JPY. The Asian regional currency crisis did not cause the yen to crash like so many of its neighbours although GDP did fall 3 percent in Japan for year 1998 coupled with three major Japanese bank failures. In fact, during the 1997-98 Asian financial crisis the yen appreciated as Japanese banks called in their loans, the luxury of being the world’s largest creditor. The Japanese yen has been and is still currently one of the most volatile currencies in the world today amongst the rich industrialized countries. The Japanese authorities however have intervened at times to maintain an orderly exchange value, in essence, the yen more reflects that of a ‘controlled’ currency rather than the so-called floating exchange rate regime that it supposedly follows.
POLITICS: stable. Liberal Democratic Party (LDP) is in power and has dominated Japan’s political landscape since WWII. Prime Minister Jurichiro Koizumi in power since April 2001. Previously, Japan has a track record of replacing their Prime Ministers every two years to maintain stability as is the case over the previous 15 years to PM Koizumi. Prime Minister Koizumi was elected with a mandate to implement structural reforms although the process to date has been slow coupled with political deadlock. Japan must reform the relationship between politicians and business - element of corruption. The keiretsu system in which companies are interlocked through webs of cross-shareholdings. Reforms are necessary as it is legally not easy to layoff workers in Japan thus increasing market inefficiency unlike countries such as the United States where the workforce is very fluid. Cross shareholdings, zero interest rate policy and excessive government regulation prevents new industries in Japan from growing as these policies help to keep unproductive companies afloat rather than the necessary consolidation and liquidation to take place. The government is preventing reforms from taking place quickly in order to spread the pain over time, a gradual shift that they believe will be politically acceptable thus avoiding any social disruptions. PM Koizumi also plans to implement more tax cuts, reduce government spending & increase the sale of state assets in order to boost consumer and corporate spending.
ECONOMY:mild stable recovery. Japan’s economy for the most part remains a protectionist state that opposes foreign investment, nor does it allow for inefficient businesses to go out of business. The economy entered its fifth recession since 1990. Sovereign risk ratings for Japan remain sound although major institutional rating agencies have lowered them over the last year from their AAA rating to AA-minus (2003). Japanese bonds and sovereign ratings are the lowest amongst the G-7, Moody’s in 2002 lowered Japan to an A2 rating. The nation’s heavy indebtness is a result of the government attempting to stimulate the economy via massive spending programs during the 1990’s. The Japanese economy is saddled with domestic debt. Currently, gross public debt levels are very high at 155 percent of GDP compared to 60 percent in 1992. Japan’s domestic debt to GDP ratio is the highest amongst the G-7. This figure is even higher if unfunded pension liabilities are also included although net public sector debt is satisfactory at 68 percent of GDP (2003) due to the Japanese government’s holdings of high quality assets. Household debt is also alrming at 135 percent of income (2003).
Japan’s stop-go growth economy has followed a pattern of an economy struggling to move in a direction of sustainable growth. The economy has been in a very mild deflation since 1997 and has also recorded negative GDP growth from 1997-2002. Japanese business culture is largely based on the belief that failure is inconceivable. Japan is indeed a very powerful economy, best compared to an oil supertanker. Once the economy begins it steady sustainable GDP growth forward, the Japanese government has much room to manouvre as Japan is a relatively low taxed nation amongst OECD countries (27 percent of GDP) particularly when comparing consumption taxes. Japan can start by increasing consumption taxes to say 7 percent from the current 5 percent which will help to narrow the budget deficit gap to 3 percent of GDP within 5 years. The Japanese people have accumulated a huge pool of domestic savings. Once the tide turns positive, this pool of idle capital will be the backbone of a new sustained domestic consumption based economy as consumer spending accounts for 55 percent of GDP which is below the OECD country average of 65 to 70 percent. Markets are psychological, once the Japanese see modest sustained inflation, they may renew their interest to spend and invest as it is no longer to their benefit to hold cash as it is during deflationary times. A further stimulus would be for the government to eliminate all capital gains taxes coupled with a lowering of corporate income taxes. Japan cannot continue to rely on its exports as the economy transforms to a more service knowledge based economy from a manufacturing based, the domestic economy will have to pick up the demand.
The overall economy is consolidating with corporate mergers such as the case in the banking & steel industry. Domestic consumption remains stagnant coupled with a weaker USD hurting export sales for Japanese corporations such as Toshiba, Fuji, etc, America represents 30 percent of Japan’s exports. Japan Inc. is moving towards a model of smaller government and entrepreneurs away from massive government demand induced spending of the 1990’s. Japan is an economic machine with global conglomerates in automobiles including names like Honda, Toyota and in the electronics industry with corporations like Hitachi, Sony. Japan produces top quality products that much of the world desires. With few natural resources, Japan has successfully evolved into a finished high-end manufacturer home to some of the world’s largest steel mills. Economic trends include a silent shift from full-time labor force to more part-time jobs.
Economic Statistics
GDP market is measured at $4.5 trillion USD (2005) and GDP/Capita at $35,000 USD. As measured by purchasing power parity, total GDP stands at $3.8 trillion USD with GDP/Capita at $30,000 USD. Real GDP growth has been in a range of a range of minus 1 to plus 1 percent over the last several years. GDP growth for year 2003 fell by 1.2 percent, year 2005 GDP growth estimate is at 0.8 percent, 2006 at 1.9 percent. Inflation for 2005 is currently running at minus 0.2 percent (deflation), year 2006 is projected at zero. Inflation for 2002 was measured at negative 0.9 percent after it declined by 0.7 percent in 2001. The budget deficit peaked at 11.4 percent of GDP (2001-02) and is still at unsustainable 6.2 percent for 2004-05 and is forecasted at 5.2 percent for year 2006, the fiscal deficit averaged 6 percent during the 1990’s. Japan’s current account balance is in surplus at a very healthy level estimated at 3.6 percent of GDP for year 2005, the surplus has fluctuated between 2 and 3 percent of GDP over the last 5 years but is declining modestly with the increase in world oil price. FDI remains very low at 1 percent of GDP.
POSITIVE:very low net external debt, public sector is relatively small, privatization of state corporations, high savings rate. CONCERN: earthquakes, a large portion of the Japanese economy is unproductive as 70 percent of corporate Japan pays no income tax, the public pension system is under pressure similar to many other OECD countries. Japan faces a major demographic problem as the overall population is expected to start declining by 2007 with a record low birth rate and ageing population with higher medical costs on the way. By 2025, one elderly for every 2 workers, Japan will need 17 million immigrants by 2050 to keep the population stable. No oil reserves although Japan is the second largest consumer.
STOCKMARKET: contrary to general opinion, the Japanese Nikkei 225 is not ailing and in dismal shape as widely suggested in the media, in fact it is appropriately valued for a mature economy. The Japanese stockmarket reflects an immensely diversified Japanese economy. During the bubble valuations of the late 1980’s, price earnings ratios for many Japanese listed stocks were at multiples of 60, 70 and 80 times earnings similar in many ways to today’s precarious market valuations in the United States. A decade of proper price adjustment and realignment has taken place. Most Japanese citizens do not own stocks unlike America, only 1 in 14 Japanese own stocks. The Nikkei 225 is down 75 percent from the market peak where it reached a mind boggling valuation level just below 40,000 in 1989. The market has since corrected to a more historical market global valuation of 11,500 as of June 2005. However, the Nikkei 225 has bounced up 40 percent since its multi-decade lows achieved in March 2003 from the 7,800 point level. The Japanese banking system will be vulnerable if Nikkei 225 falls below the 7,500 level as banks will be offside in capital adequacy ratios of at least 8 percent as set out in BASEL.
REAL ESTATE: collapsed in value since the bubble peak 15 years ago. From 1997-2005, residential home prices have fallen 23 percent. Rural real estate in Japan is still falling although 2004 was the first year to record a very modest price increase (during at a time of massive real estate bubble amongst many industrialized nations) for homes in major Japanese cities since the start of its depression in 1991. Tokyo real estate increased in price by a slim 1 percent in 2004. Many properties today remain at 40 percent of its 1990 peak value. Commercial real estate has also fallen dramatically since 1989 with declines reaching 75 percent.
JAPAN’S DEPRESSSION:14 years from 1991-2005. Classic asset liquidation and capital re-allocation within the Japanese economy as bankruptcies continue. The severity of the depression is largely the function of the scale of the excesses that accumulated in the preceding boom. The late 1980’s bubble economy will take years to wring out the excesses, this in BankINTRO.com’s view may take another 8 years to correct. Japan failed to drastically lower interest rates in the early 1990’s quickly enough after the bubble burst thus prolonging the depression. Interest rates in August 1990 were at 6 percent, today nominal short term overnight interest rates are at zero where they have sat for the last 4 years. Japanese unemployment stayed at 1 to 2 percent range for years until mid 1995 at which point it has started a steady increase. Current unemployment is at 4.5 percent is now a reality, rising to most likely peak out at the 7 percent range similar to other Western countries. CPI deflation for 3 consecutive years now although the range has been from -1 to +1 percent for the last decade. Unfortunately, deflation is predicted until year 2007 as deflationary times are challenging as the public prefers to hold cash and gold. On January 24, 2003, interest rates in Japan went negative to minus 0.01 percent. Current 10-year JGB is trading at around the 1 percent level.
FUTURE ECONOMY OF JAPAN: key industries will include nano-technology, biotechnology, knowledge industries of software & Internet applications (ie. cell phones “i-mode”), cars, electronics, robots, video games, global banking financial services and greater allocation to increase military spending. There are structural shifts taking place due to demographics, globalization resulting in the Japanese economy moving more towards other Western economies with a shift from full employment ‘Jobs to life’ to unemployment in the 5 to 8 percent range. The overall quality of life will remain superb in Japan although BankINTRO.com forecasts GDP/Capita has declined from Japan’s very high $30K/year down towards the $25K/year USD range. The bottom line, Japan is a world leader in many industries and their quality of products are excellent ie. cars, electronics. These great products are in demand by the rest of the world, ask your financial advisor about his concept?
Japan’s transformation from an export based economy, export leaders that make trillions to a shift towards a new domestic led consumption economy similar to theUnited States in the 1960’s. The Japanese economy today is like pruning a tree, the excesses to be trimmed out and a stronger economy will be the end result. Inefficient firms to eventually be eliminated through a processs of liquidation & bankruptcies over time due to the slow pace of reform. Japan in 10 years time will be a much stronger economy and continue to be a global force. Solution is to increase the growth rate and end the deflation, a yen depreciation may help. Japan may have to change its cultural thinking and allow mass immigration to spur the economy like so many other countries have done in addition to allowing greater access for imports and competition. The politicians in Japan must implement reforms now matter how unpopular and allow for inefficient firms to go bankrupt rather than keeping them afloat. In time, eroding financial position will force the polticians to raise certans taxes and implement these unpopular reforms.
BANKING SYSTEM:severe banking malinvestments remain but are manageable, banks are returning to profitability. The Japanese banking system is moving towards centralized capital allocation (more state control) with megabank mergers as Japanese banks are consolidating their operations to recover from billions of dollars in bad loans. There has been a wave of bank consolidation now with 4 megabanks amongst the largest banks in the world today. During 2000-01, these include the Mitsubishi Tokyo Financial Group, Mizuho Financial Group, Sumitomo Mitsui Banking Corporation and United Financial of Japan Holdings (bought/merged in 2004). Japanese banks are moving towards the ‘too big to fail’ scenario. There have been discussions in the possibility of nationalizing the banking system as tax revenues have been used to recapitalize the banks. The big banks still remain somewhat vulnerable particularly to a macro-economic shock as they continue to support literally bankrupt companies thus deferring formalizing their loan losses.
For years, several analysts have suggested that the banking system is going to crash and become insolvent as a result of the asset bubble collapse in the late 1980’s. Many Japanese banks are sitting on real estate loans and stock portfolios that are showing huge paper losses. Many Japanese citizens have shifted their monies to foreign banks and gold bullion. Mattress money in Japan is estimated at $250 billion USD (2003), if tapped into, this alone could surge GDP growth. Non-performing loans in the Japanese banking system are estimated at $430 billion USD or 10 percent of GDP approximately, other estimates have the figure closer to $1.2 trillion USD for the entire Japanese financial system (2003). Since 1992 to 2003, Japanese banks have eliminated $660 billion USD in non-performing loans. Government monies to shore up the system to help the banks write-off bad debts has taken place and will continue as this liquidation process will take years to complete. There have been life insurance and bank casualties to date but far from the dire predictions by many. There has been a decline in bank lending to business although new commercial finance lenders have taken up the slack for those banks refusing to lend albeit at higher than market interest rates.
Bank of Japan (‘BOJ’) is committed to maintaining zero interest rate policy until deflationary conditions are no longer feared, most likely until 2006-07. Negative interest rate differentials makes it less attractive to hold yen when compared to other banking systems with higher interest rates including the eurozone and United States. However, many have recommended a goal for the BOJ to target inflation at a 3 percent level, this would reflect a yen depreciation to meet this objective. Official reserve assets are enormous amounting to $842.4 billion USD as of May 2005 and are growing steadily thus placing exchange appreciation pressures on the yen in relation to the USD. The Bank of Japan has earned billions in profits in foreign exchange reserves, their currency exchange interventions are the largest in the world with an active role of buying and selling USD and yen. The pension & postal systems are two of the largest pools of investment capital in the country. In fact, the Postal Savings System (Japanese post office) is one the world’s largest financial institution with over $2 trillion USD in deposits although Prime Minister Koizumi wishes to privatize this institution beginning in 2007 as this process will last for years.
The Japanese government has and will continue to step in to support the banking system capital base. The government has injected cash into the banking system several times over the years shore up liquidity to the banks, more recently to Japan’s fifth largest bank ‘Resona’ in spring 2003. With this support, Japanese banks will continue to adhere to high credit ratings even with Japanese banks flirting with BASLE ratio of 8 percent.
KNOWLEDGE: Japan’s Domestic Public Debt
It is almost impossible for Japan to default on its large public debt. The majority of Japanese public debt is yen denominated and is held by domestic investors. The BOJ can always print more yen to pay its bills although this would be inflationary. Japan can also refinance and repackage the bonds with a new ammortization period if required, creative refinancing since 95 percent of the public debt is domestically held. Japan is in no danger of default particularly with its massive current account surpluses. Countries that get into trouble with sovereign debt defaults & economic crises are those nations that have large net external debts where they owe foreigners and have debt issued in foreign currencies. This is not the case with Japan. Japan is going through a slow gradual debt liquidation, the banking system is continually evolving with consolidation and is strengthening over time. Japan’s banks and economy are not going to implode. As Japan is the largest creditor in the world with net foreign assets at 38 percent of GDP (2003) - massive holdings of foreign currencies will help to offset this debt obligation as they may wish to liquidate their foreign holdings to bring their money home to pay their bills.
GLOBAL and REGIONAL ANALYSIS: China, Asia, Russia
China with cheaper labor costs are attracting Japanese manufacturers of whom are setting up branch plant facilities and thus exporting Japanese goods made in China abroad from the Chinese mainland. China became Japan’s number two export market as exports are growing at 30 percent annually to China and are valued at $28 billion USD for year 2000-01. In fact, during this time period, China received 47,000 sport utility vehicles from Japan. Conversely, China benefits as well as it is now the largest supplier of imports slightly ahead of the United States now. China is a very important market for future Japan as China will evolve to become the largest economy in the world in the 21st century thus providing Japan with another large consumer market. Currency exchange valuations are of particular interest to Japan as the Chinese yuan is fixed to the USD, hence, any appreciation by the yen versus the USD will impact Japan’s cost structure from China due to its fixed currency link to the USD. However, the near term may see China’s economy sharply slowdown in the short to medium term as some analysts think China is in the midst of a bubble, however the long term very positive for China.
Japan also has an eye on other Asian countries of which they are currently on the economic upswing as is the case with Indonesia, Thailand. Globalization of economies via technology will result in higher Japanese unemployment as water finds its level as the world economies integrate. Japanese and South Korean relations are improving although both economies are currently battling with higher commodity prices, especially with steel. Perhaps an Asian region economic slowdown is on the horizon? Russia with its sea ports provides access to important energy resources for Japan for buyers of Russian coal via Siberian Rail Lines. Of immediate attention is the looming North Korean missile threat, perhaps armed with nuclear warheads. The Asian region as a whole holds a very impressive foreign exchange reserve position over $2 trillion USD. Other concerns for the region which may directly impact Japan is the high world oil price, oil is indeed the economic wild card. Japan is the world’s number two oil consumer at 5.3 million bpd.
CURRENCY: ISO Symbol ‘JPY’, Japanese yen, yen means ‘circle’. At time of review on June 20, 2005, the JPY had an exchange value of 108.99 JPY to the USD and corresponding trade exchange value of 132.79 JPY to the EUR. The yen follows that of a floating exchange rate regime since 1973. Recent low valuation for the yen versus the USD occurred on February 18, 2002 at 135 JPY to 1 USD. The yen is used primarily only in Japan whereas the USD is used throughout the world. A bull market in the USD beginning in 1995 weakened the value of the yen tremendously. From 1995 until 1998, the yen fell 68 pecent verus the USD from the 80 JPY to 134 JPY level. A declining yen will be deflationary for the rest of the world.
As measured by purchasing power parity (‘PPP’), the yen is overvalued versus the USD by approximately 22 percent as of June 17, 2005. Conversely, an interesting PPP valuation as presented by the UK’s Economist Magazine has the yen 23 percent undervalued on its Big Mac index. Is the Japanese yen a safe haven currency in time of global crisis? Indeed yes. In 1998 during the Long Term Capital Management crisis in the United States, the yen appreciated 24 perecent versus the USD, it also went up 20 percent to the USD in the Mexican Tequila crisis in 1995 and rose 15 percent to the USD in the 1987 U.S. stock market crash. During the 1997 Asian financial crisis, the yen strengthened as Japanese banks panicked and called in their loans to the rest of Asia resulting in positive capital inflows for Japan during this time. Current appreciation pressures to the yen include large current account surpluses of which includes the growing income surplus coupled with increasing FDI and portfolio inflows. So far in 2005, capital inflows remain modestly positive with FDI still positive at 2 percent of GDP but very low when compared to other G-7 countries.
Currency Intervention
As an exporting nation, the value of the yen relative to the USD is very important for Japanese companies and their exports. Some analysts have an exchange value of 100 JPY to the USD as the absolute break-even value for Japanese exporters. The yen versus the USD may fluctuate in value on a wide margin during various times of the year. The exchange volatility maybe looked upon by analysts as an orchestrated intervention by the Japanese authorities to support their export based economy. The Japanese government with the benefit of massive trade surpluses can somewhat influence the value of the yen by selling yen (printing money to battle domestic deflation) and buying US-dollars (bonds) ‘stabilize the yen’ when they wish to help Japanese companies sell products abroad.
The Japanese government spends tens of billions of US-dollars intervening in the currency markets to the benefit of Japanese corporations. Massive Japanese currency interventions took place shortly after the terrrorist attacks on the United States in September 2001. From January to August 2003, Japan intervened in the currency markets by buying a huge amount of USD equivalent to $75 billion US-bonds to help keep the yen down. Japanese currency interventions also include other currencies with the Euroland euro (‘EUR’) playing a larger role in the future. Currency interventions primarily include the buying & selling of EUR and USD and JPY. During year 2003 to date, the Japanese authorities are trying to keep a ceiling on the yen’s appreciation. Between September 2003 and April 2004, the authorities further intervened by the tune of $220 billion USD, $71 billion USD alone in January 2004. No wonder Japan’s foreign exchange reserves are exploding! It appears that these interventions have ceased for now, but if the yen appreciates to 90 JPY to the USD, expect the Japanese authorities to step in again.
CURRENCY HISTORY: during the 1970’s and 1980’s in particular, Japan built their export industry and economy with an artificially cheap currency tostimulate its export economy to get its products sold abroad. Key exchange valuation dates for the yen during the 1970’s include: January 1972 at 312 JPY to 1 USD, March 1973 at 262 JPY, March 1976 at 300, July 1978 at 200. During the early 1980’s, the Japanese yen remained with a low exchange rate and experienced wild volatility in valuations: January 1980 at 238, January 1981 at 202, October 1982 at 271. By the mid 1980’s, the Japanese economy was on fire and performing extremely well. Accordingly, the exchange rate appreciated as other industrialized nations put pressure on Japan to appreciate their exchange rate to reflect its economic performance: March 1985 at 257, January 1986 at 199, January 1987 at 153, January 1988 at 127, January 1989 at 127. Surprisingly, after the bubble burst in the early 1990’s and the Japanese economy became somewhat unglued, the exchange rate held for the yen and actually appreciated hitting a market high in 1995. Key dates have the yen at: January 1990 at 144 JPY, January 1991 at 133, August 1993 at 103, December 1994 at Y100, April 95 at Y83 (errors in Japanese monetary policy resulted in this inflated figure). Recent valuations over the last few years have the yen in relation to the USD at April 2005 at 107.21 JPY to the USD, January 2005 at 103.34, January 2004 at 106.31, June 2003 at 118.32, January 2003 at 118.77 JPY, June 2002 at 123, year 2001 at 122, 2000 at 108, 1999 at 113, 1998 at 131, 1997 at 121 JPY 1996 at 109.
CURRENCY FORECAST: in the short term, a modest depreciation to the USD as the USD counter cycle rises in the short term reflecting US interest rate increases. The yen may fall to 115 JPY by year-end 2005 then rally back towards 100 JPY to the USD in 2006 as the USD continues its weakening trend and appreciating to 92.5 JPY to the USD for year 2007. In comparison to the EUR, year-end 2005 at 137.5 EUR and year-end 2006 at 122.5 JPY. The US Fed may begin to ease by early 2006 which will thus make the yen stronger as the interest rate differential begins to narrow. The Japanese government is considering re-denominating the currency by converting 100 yen into 1 yen resulting with a valuation on par with the USD and EUR, this action may help give an inflationary boost as many Japanese people may spend their mattress money. During QTR1 2003, deflation in Japan hit 3.5 percent, spring 2005 the Japanese economy was in a mild deflation after showing positive inflation of 0.8 percent for 2003-04. It is important to note that the yen is a controlled currency with the Bank of Japan authorities having great authority over its valuation. BOJ has the option to devalue the yen to halt deflation but this is unlikely as it is forecasted that very modest inflation will return for 2007.
Surprisingly in December 2002, Japanese finance Minister Shiokawa said that a yen trading between 150 to 160 JPY to the USD reflecting purchasing power parity level would be the preferred trading range. This reflects upwards of a further 40 percent decline in the yen as the minister suggested the yen was substantially overvalued. However, this is not reality, it is expected the yen will trade in the 100 to 110 JPY to the USD range and 125 JPY to the EUR and further USD weakness is expected in 2006. The USD alone for comparison is dicey for due to severe malinvestment flaws in the USD, the USD will likely hit the wall in 2006 and collapse by 30 percent to a trade weighted basket of currencies.
In the long term, Asia itself could wind up with either one or two regional currency blocs including China’s renminbi/yuan and the Japanese yen. The choice is deflation in the price level or depreciate the yen? BankINTRO.com believes both will happen but a long term policy shift towards a lower yen and a continued increase in the money supply is underway of which will help support the Japanese domestic price level. In addition, BankINTRO.com also believes that the Japanese authorities will allow for a slow managed depreciation of the yen as a vehicle to solve the nation’s debt quagmire although 97 percent of Japan’s government bonds are domestically owned (yen to depreciate against gold, CNY, EUR, CHF) while carefully not to upset regional currencies and provoking another Asian currency crisis similar to 1997. The net effect of devaluing the yen will result in lowering the real level of the yen denominated bad debts in the economy while stimulating inflationary pressures and making exports more attractive. Rising U.S. interest rates in the short-term will further temporarily weaken the yen in relation to the USD as the global yen carry trade (borrowed yen reinvested into higher yielding dollar assets) will continue. The yen for the most part is supported only by its consistent large current account surpluses, global creditor position and strong official reserve postion.
Currency safeness is good, excellent reserve coverage - liquidity, the Japanese yen remains as one of the world’s strongest currencies. As the world’s largest creditor nation, as history suggests, Japan will be the strongest country economically when it exits the depression. Japan will remain a major global economic power.
UPDATED: June 20, 2005
![[Most Recent Exchange Rate from www.kitco.com]](http://www.weblinks247.com/exrate/exr24_ye_en_2.gif)