Japanese Prime Minister Yukio Hatoyama has named Naoto Kan, the Japanese deputy premier, to replace Finance Minister Hirohisa Fujii, who stepped down because of health issues.
Kan, referring to the yen’s exchange rate at which Japanese companies are comfortable doing business, said at a Dec. 16 news conference that he advocates “a weak yen to a certain extent.”
He says that many Japanese companies favor the dollar trading around 95 yen and that he will work with the Bank of Japan to get the currency to "appropriate" levels.
It’s still anybody’s guess what he considers “appropriate” levels for the yen and how far he would allow the Japanese currency to slide.
I wouldn’t be surprised to see the Japanese currency returning to the 110 yen per dollar zone, which is about 20 percent from the 92 yen it trades against the dollar these days.
In my opinion, we won’t have to wait until next year to see the yen hit the 100 yen per dollar mark.
Never forget that all currency moves — be it up or down — commonly overshoot.
I don’t think that this time will be different.
To me, the big questions for Japan remain how officials are going to steer the Japanese economy through the morass of a soaring deficit, which is closing in on 200 percent of gross domestic product (the latest IMF number for Japan was 198.6 percent, while the United States still stood at 61.5 percent and Greece at 100.8 percent of their respective GDP levels), and deflation — while ensuring the passage of the 2010 budget.
It will be interesting to follow.
The bottom line: I don’t see a problem with shorting the yen and using it for carry trades if you can support some risk taking.
And Kan is not alone in favoring a weaker currency.
In Europe, French President Nicolas Sarkozy said a strong euro is denting the competitiveness of the euro zone and risks handicapping European companies as they recover from the global recession.
He asked, “If one produces in the euro zone and sells in dollars, with the euro rising and the dollar falling, how is it possible to offset the competitiveness gap?"
I agree with Sarkozy.
If the euro should continue to show strength, it will remain a non-desirable economical, as well as a political, thorn in the side of the euro zone.
That said, there also has recently been rising investor concern about nations, such as Greece, being litmus tests for sentiment toward the euro zone as a whole and, hence, the euro.
European Central Bank Executive Board member Juergen Stark recently made some interesting comments on Greece when he said Athens had in recent years not controlled its public accounts or worked to help improve the country's competitiveness.
“The Treaties envisage the non-rescue clause and the rules must be respected,” he said.
In other words: No bail outs are to be expected in the euro zone as long as the Treaties are not revised.
In this context, the European Union's first full-time president, Herman Van Rompuy, has called the EU’s national heads of government to Brussels on Feb. 11 for a summit.
The meeting is to prepare a 10-year program aimed at boosting Europe's competitiveness and economic growth, after the failure of a similarly ambitious strategy for the decade that ended last month.
Van Rompuy says — and believe me, this is very important — economic reform is a priority, as the EU must at least double its average annual growth rate of 1 percent if it wants a generously funded welfare state and high living standards fueled by a free-enterprise system.
I can’t imagine the EU could meet that goal with an overly strong euro.
So, in my opinion, we can expect a weaker euro.
I think we have seen the last euro high of 1.55 per dollar for some time.
The euro could easily move back the 1.25 zone we saw the fourth quarter of 2008 and first quarter of 2009.
Longer term, I wouldn’t exclude the euro hitting the 1.15 per dollar zone.
I won’t go as far, for now at least, to mention the dollar and euro at parity in the future once again.
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