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Japan Continues to Wrestle With Yen's Strength

Japan Continues to Wrestle With Yen's Strength

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Monday, 11 April 2016 07:53 AM Current | Bio | Archive


Global growth data continues to do better than financial markets had been expecting.

Taking into account that emerging markets have since the crisis faced extremely difficult conditions that have brought down substantially their growth rates in such dimensions that the group as a whole had the potential to bring world growth practically to a halt, it is noteworthy that the Citi Economic Surprise Index for Emerging Markets continues to rise.

Further revisions to data have also been biased to the upside.

As the IMF-World Bank Group meetings take place this week in Washington D.C., it will be interesting to see how and to what extent the World Economic Outlook (WEO) forecasts will be revised.

Please keep in mind the IMF forecasts tend to change some months “after” those of market economists and so the IMF publication is not perhaps new information, so much as validation of views that markets accepted some months ago.

Given that the Christine Lagarde, Manager Director of the IMF, has been down beaten her remarks, presumably this new report will "unsurprisingly" stress the downside.

Now, central bankers with concerns about global forces could perhaps take note of this although there has been very little “real” evidence of extraordinary uncertainty in the global economic outlook, and perhaps all the talk about global forces is simply a fig leaf of justification for dovish “prejudice.”

From China, we got more evidence of inflation pressures building. Local inflation in the U.S., China and parts of Europe is starting to attract attention as well it might.

The Chinese pressures do remain primarily a local consideration. Food prices keeping CPI elevated for instance. There was also less deflation than anticipated in the producer prices inflation figures.

Talking about foreign exchange (FX) for a moment, and in context of the yen gaining 10 percent against the dollar, this year alone, the Japanese Chief Cabinet Secretary Yoshihide Suga told Reuters when asked about Prime Minister Shinzo Abe’s comment to the Wall Street Journal last that countries should avoid “arbitrary intervention”:

“What the G-20 is talking about is arbitrary intervention, which is different from responding to a one-sided move. The prime minister's comments were based on the G-20 understanding that long-term manipulation of currencies is undesirable.”

All this indicates Japan's strong currency moves and its monetary policy could become a hot topic at the IMF-World Bank Group meetings.

It’s a fact, the value of the yen is a very complex subject.

It’s really interesting to see how strong deflation expectations in the Japanese economy persist while Japanese consumers continue to expect inflation in the range of between 2.5 and 3 percent.

The Japanese consumer is fearful of falling incomes, not of falling prices, and that is the kind of deflation that does the damage to domestic demand in Japan.

As an investor one should try to look at it in a broader context and then you’ll see the yen moves have not been massive, which isn’t the same as quick, in either historical context or in terms of overall prices as a stronger yen does lower prices for commoditized imports.

Anyone who has a basket of goods skewed towards commoditized products like food, energy or in Japan’s particular case, pharmaceuticals, is likely to benefit.

Import prices do not normally change as a result of currency changes, but commodity prices do.

Now, groups like the elderly that live on relative fixed incomes may therefore enjoy a lower inflation rate as the prices of the things they buy decline as a result of the stronger yen, boosting their spending power and confidence.

As the older generation has been adversely affected, at least as to sentiment, by lower investment returns and the advent of the negative interest tax on savings, a stronger yen may be a good thing.

Maybe this could help to understand the Japanese somewhat better.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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HansParisis
As the older generation has been adversely affected, at least as to sentiment, by lower investment returns and the advent of the negative interest tax on savings, a stronger yen may be a good thing.
japan, investors, economy, fed
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2016-53-11
Monday, 11 April 2016 07:53 AM
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