Tags: Albert Edwards | SocGen | Japan | yen

SocGen's Edwards: Yen Collapse Will Spur More Economic Turmoil

By    |   Tuesday, 02 June 2015 01:21 PM

The Japanese yen’s decline to a 13-year low against the dollar may trigger more global economic turmoil as other countries take steps to devalue their currencies in an effort to be competitive, said Albert Edwards, head strategist at Société Générale.

The U.S. economy may suffer if foreign countries including China take steps to weaken their currencies to compete with Japanese exports. Such a “currency war” would make the dollar more valuable, but the U.S. trade deficit would grow as consumers less expensive foreign goods.

“The most important thing as the yen sets off another round in the global currency war is that China is now in outright deflation and cannot tolerate renminbi appreciation,” he said in a June 2 report obtained by Newsmax Finance. “As the yen drags down other regional currencies, and the renminbi is forced to participate in a competitive devaluation, deflation fears will surely, quickly reignite in the West.”

Edwards established his reputation as a perma-bear in 1996 with his Ice Age thesis that argued that stocks will collapse and bond values will climb because of deflation. Stocks and bonds have gained since then, but central banks also have intervened on a record scale to support growth.

Japan’s economic plan since 2012 has been to revive growth with fiscal stimulus, deregulation and “quantitative and qualitative easing” by the Bank of Japan. The central bank is buying 80 trillion yen ($665 billion) of bonds a year to push down interest rates and encourage borrowing and spending by Japanese consumers and businesses.

The yen in the past three years has lost about 40 percent of its value compared with the dollar, and may decline further as Japan keeps trying to boost wage growth and inflation. Edwards estimates Japan’s currency may fall to 145 yen per dollar from about 124 yen now.

“Worrisome deflation is already being imported into the U.S., especially from Japan,” Edwards said. “China has yet to participate, but a further round of Asian devaluations will inevitably see waves of deflation heading westwards as in 1997-98.”

During those years, Asia suffered a major financial crisis after Thailand’s economic bubble started to burst and panic spread to surrounding countries. The International Monetary Fund had to intervene with billion-dollar programs to support currencies in the region and restore stability.

“The U.S. and Eurozone remain a hair’s breadth from outright deflation,” Edwards said. “A weak yen could push them over the edge into deflation proper as China is forced to finally join the global currency wars.”

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The Japanese yen's decline to a 13-year low against the dollar may trigger more global economic turmoil as other countries take steps to devalue their currencies in an effort to be competitive, said Albert Edwards, head strategist at Societe Generale.
Albert Edwards, SocGen, Japan, yen
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2015-21-02
Tuesday, 02 June 2015 01:21 PM
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