yen

Frankfurter Allgemeine Zeitung has: The main point of the article is that a Japanese devaluation will start a series of devaluations around the world.

I’m not so sure.

Look at the raw material prices. The graph has indexed the original USD quote.

If Japan depreciates their currency with respect to the USD – it might help exports, though that is a dubious proportion as well. Considering the car prices – and Japanese cars are high quality – even up to German standard (5-10 years back even higher). That is just to take an example.

These products will have to use raw materials, energy and food for the workers. These prices will all go up with a depreciation of the Japanese Yen. Forget about capital: The last 20 years there hasn’t been any real investment profit, as capital has been tied up in zombie-banks and a dead as doornail housing market. So there is little doubt that depreciation will hit Japan’s producers and consumers full force. It is not likely that the Japanese wage earners will be able to absorb that downgrading of their living standard.

This means the even larger trade deficit will have to be financed by loans. That might be doable to some extent, but not in Japanese Yen, as creditors will demand a hefty interest rate to cover not the risk, but the very likely contingency that they are in for a major haircut in the foreseeable future with depreciation – this will mean that loans in foreign currency will be expensive as well – as the ability to pay back at all may be in some doubt.

The argument assumes that the rest of the world will follow suit and mind very much that Japan is giving away its stuff! The very process of this will increase the demand for the very goods that others sell to Japan – why lower the price? Brazil has already done so – with what result? Well they have increased their export of cattle fodder and raw materials. So what?

Russia certainly isn’t going to lower the price on oil, as there are plenty of costumers ready, able and willing to buy at offered price; Europe isn’t exactly out to undercut its prices and the US? Selling corn at bargain base prices to Japan? (That is called food-aid)

Again the jobs that could move to Asia and other “developing” markets – they have gone a long time ago.

The basic Japanese problem is that they DID not restructure their banking system 20 years ago – the banks are still stuffed with the same bad loans. Japan subscribed to the fallacy that banks might eventually return to profit by just ignoring the problem of bad debt. Same thing with South America.

As it is: To the extent devaluation in Japan succeeds it will bring about inflation in Japan. Most certainly with a large and undersupplied food market in China that is able to pay any price – for the time being. China has kept its currency undervalued for a decade. Look what it brought them: Raw material prices that has tripled and quadrupled in the period. With their underpriced exports they even exhausted the American consumers’ ability to spend.

What the Japanese should do, would be to REVALUE their currency acknowledging that the export market is dead for the time being. But that is not going to happen, as that would entail rising interest rates – a policy that would open the cupboard for the financial skeletons to rattle out. Now they are forcing even heavier burdens on the consumers and businesses – so they will be even less able to pull the financial sector out of the quack mire it sat down into 25 odd years ago.