Falling Yen

The falling Yen may fall to its lowest this century as Japan misses its inflation target. CNBC reports the story.

Reports the Bank of Japan (BOJ) is preparing to lower its inflation outlook could push the yen to its lowest level in 13 years, analysts say.

“Pushing out your inflation targets for a couple of years probably just means the yen will stay on this weakening trend,” Trading Partners managing director Peter Boardman told CNBC. “[The yen] might go to 130-140 [against the U.S. dollar] in the future,” levels not seen since the post-dotcom bust in 2002.

Two years after pledging to drag Japan out of a twenty-year deflationary spiral with a huge quantitative easing (QE) program, the BOJ’s self-imposed two-percent inflation target remains out of reach.

With the central bank’s bi-annual economic outlook review due next Thursday (April 30), the Nikkei reported that BOJ board members are discussing whether to downgrade their inflation forecasts for the next three years.

The combination of a strengthening dollar and falling Yen are important signals for Forex traders.

Japan and Deflation

A quarter of a century ago Japan appeared set to financially conquer the world. Japanese investors bought up assets in the USA and elsewhere. Then a network of hidden debt came to light and extinguished the Japanese economic miracle. Japan went into a deflationary spiral in which manufacturers produced and sold for less, wages stagnated and even fell and cash became king while commodities and real estate lost value. Japan is currently trying to fight its way out of this trap and wants inflation. The currently falling Yen is a symptom of the lack of success that Japan is having. The Wall Street Journal interviewed the Japanese Prime Minister, Shinzo Abe regarding trade and deflation.

In an exclusive interview with The Wall Street Journal, Japanese Prime Minister Shinzo Abe said Japan and the U.S. are near an agreement on a trans-Pacific trade deal. Mr. Abe also said that while he can’t guarantee deflation won’t return, Japan isn’t experiencing it right now and he trusts Bank of Japan Gov. Haruhiko Kuroda to use the right policies to reach the central bank’s inflation goal.

Mr. Abe’s optimism regarding the defeat of inflation is not shared by everyone as demonstrated by the falling Yen.

Exporting Deflation

Japan’s efforts to fight deflation by establishing a 2% inflation rate are having the effect of exporting Japan’s deflation to neighboring countries such as South Korea, Taiwan and Singapore. Bloomberg writes about Japan’s newest export.

But South Korea has been hit particularly hard. The country’s 4.7 percent plunge in industrial output in February is the latest sign that deflation is on its doorstep. The country’s consumer prices also rose by only 0.5 percent last month (the slowest pace since 1999), and its exports were down 3.4 percent.

Korean manufacturers have responded to the yen’s 20 percent drop in value by trying to keep the prices of their own products down. In practice, that’s meant executives with excess cash on their balance sheets have avoided making investments or giving workers a raise. The resulting wage suppression, however, is having negative consequences of its own, by hampering domestic consumption. (It doesn’t help that Korean households are sitting on record debt, equivalent to about 70 percent of gross domestic product.)

The falling Yen is something that Japan wants, within limits. However, regional deflation could be a disaster.