Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

Forecast: Japanese Yen Parity by Year End

The Japanese yen receives far too little attention, and has risen a trifling 10% in the last year. The euro stole most headline attention all last year, unrestrained. We Americans come mostly from European stock (my roots extend to Ireland, Germany, and England.) The European Union as a whole enjoys a trade surplus with the USA somewhat below the $90 billion annual surplus registered by the less populated Japan. Factor in the PacRim tigers such as Korea, Taiwan, Hong Kong, Thailand, and Singapore, and a trade surplus adds up to the $110-130 billion range. These figures account for nations whose currencies float. Now factor in China with another $130 billion, whose currency is fixed versus the USDollar. Asian total surpluses rack up over a quarter a trillion dollars annually.

One must conclude, given chronically large Asian surpluses, that currency exchange adjustments and their effects vis-à-vis Asia have been largely unaddressed. Asia is the next region to watch on the FOREX battleground. A Japanese surplus joins with a Chinese surplus to present colossal pressure for the USDollar to decline, despite large-scale Japanese capital investment in China. The yen is the pressure valve. Consequences to import prices threaten the American consumer, who has become accustomed to buying cheap Asian-made goods. Implications are ominous to central bankers across the Pacific Ocean, where 45% of US Treasurys are horded. Seasoned traders expect higher interest rates before long.

Currency markets are setting up a new USDollar ceiling around 89-91 on the yen (110 to 112 in yen/$), established end March to early April. As the euro took the FOREX heat in the year 2003, we are sure to see the yen attract the most attention in the year 2004. Volatility has returned to the mix in both the currency and bond markets. The yen rising 50-day moving average, shown in blue, is prone to provide ongoing support for the currency, as in the past. Of course, a more robust recovery between our shores could extend the USDollar bear bounce underway. The euro should struggle all year long to top the 1.29 high set in January, as the European Central Bank faces numerous temptations to cut rates and deliver a shot in exporter arms. The yen has realized a breakout on the right shoulder, having attained the 94 target shown by the bullish triangle. Notice the impulse low at 80 in October of 2002, and the flat resistance at 87. It reached and surpassed the 94 target, and rose slightly above it upon retest. The 50MA held during the scary selloff in March. Don’t be surprised to see a new bullish ascending triangle form with a new flat resistance at the 95-96 level. Such a pattern could become evident as resistance holds, while the 50MA offers rising support. But this is pure conjecture. If not perfect forecasting tools, charts are good guides.

In the next stage, the Japanese yen will shoot for parity, and realize the 98-100 target from the bullish inverted Head & Shoulders pattern. The neckline lies at 86-87, and head bottoms at 74 in a textbook pattern, to expose a 12-13 point potential. The event should come in the second half of this year, and make headline news while Japanese import prices push higher for American consumers.

ALL FOREX EYES TO THE EAST

Stage #1 of the breakout saw the Japanese yen advance in October from its bound  range for several months. We saw a 10% move up from the 85-87 range to the mid to 93-95 range. Stage #2 will see the yen continue toward and beyond 100 parity after its current struggle to retrench. The fallout potential is vast but unrecognized. Asians build the majority of our imported finished and component products. Asians control the largest block of US Treasurys. Asians are the largest buyers of both our government bonds and agency (mortgage) debt. Volatility has returned to all three major currencies and the US Treasury market, a clear signal of earthquake tremors. Hapless US economists pay little heed. They continue to focus on Europe and its growing stagnation. They issue claims of a USDollar having fallen enough. The European Central Bank feels pressure to cut rates and force a lower euro, while the Bank of Japan supposedly remains in our hip pocket. Changes are coming from Asia, largely unnoticed.

Please forgive my salty style, but this writer has little respect for either economic policy or economic thought processes. The compass used suffers from massive political interference, directing most policy decisions to be 180 degrees off a proper course. Our financial leaders pay no respect to economic laws of nature or to economic history. In fact, they conjure up their own queer brand of “American macro-econ wizardry” along the way in utter arrogance. If they show no respect, if they pervert the science, if they distort the data, if they boast in the face of failure, then they in turn deserve no respect themselves.

The following words were penned in my article “Ass-Backward Economics II” in describing the unstable situation with the Japanese yen, back in the first week of August, 2003. The prediction came to pass. Stress often comes to currency markets during the month of August, which sets up big moves in the early autumn. Last August my words were:

The Japanese Nikkei stock index has moved strongly upward, breaking a longterm downtrend. First their bonds fall, then their stocks rise, next their currency rises. Note the clear longterm [inverted] "head & shoulders" bullish pattern in the yen currency, a very reliable pattern in its weekly chart. Note also the nearterm "ascending triangle" bullish pattern in the same chart, which appears to be in a tough struggle for resolution. The Bank of Japan is in the fight of its life. They desperately seek to emerge from the tight grip of the multi-year Liquidity Trap. They have coerced money out of the $11 trillion pool of individual savings. In doing so, they have also encouraged capital frozen in their moribund govt bond market to exit. The beneficiary so far has been their stock market. In its wake will follow their yen currency. Forces could easily become too great for the BoJ to withstand and resist a damaging yen appreciation. Sea changes are coming to the American shores, a potential tsunami from Japan.

Days of reckoning lie ahead. America will be weakened in the remedy phase with imported inflation in the form of rising imported product prices, a long overdue reversal of a trend that has endured for almost 20 years. We have printed money, issued debt, extended credit, and sent the money abroad to pay our bills. In effect, we have exported our inflation, if not our counterfeit operation. Next is the reverse. It will be ugly.

The reaction by the Bank of Japan early this year to the breakout has been truly historic in its scope. They tried to call back the ocean tide. When one takes into account the magnitude of the intervention by the Bank of Japan, which has been to forestall an even greater yen upward move, the word “significant” seems inadequate. The BOJ has done the Federal Reserve’s bidding. They act to support the USDollar via our Treasury bonds overnight with freshly printed yen, while we sleep. They perpetuate our easy credit terms, and enable our spendthrift consumption. They plant future seeds of inflation, even as they inhibit a rebirth. Continued sterilization policy (of trade surplus) infects their system with inflated reserves in USTBond denomination.

Clearly, symptoms now warrant the term “crisis” to describe the current monetary climate. Japan’s central bank squandered $184 billion in currency intervention during the calendar year 2003. They continue this waste, squandering a reported $100 billion in the first two months of 2004. Weigh these numbers. The Bank of Japan in the year 2003 actually subsidized US Treasurys in an amount two to three times its annual bilateral trade surplus with the USA. This is lunatic, not evidence of claimed flexibility.

BANK OF JAPAN FACES “SOPHIE’S CHOICE”

Reports abound concerning whether the Bank of Japan relents in support of their yen currency. Debate behind the scenes gathers on whether a trade surplus actually suppresses economic growth, yet another example where scrutiny should be directed toward backward prevailing economic opinion. We in the United States see twisted growth spurred by trade deficits, while Japan’s decade of surplus have earned them stubborn economic sluggishness.

The BOJ will be forced to choose, a “Sophie’s Choice” if you will. In the stirring movie, the mother Sophie was forced to choose which of her two children would face death camp execution in Poland in WW2. The BOJ must not block the green light for continued massive foreign purchase of Nikkei equities, which serves to confirm the final steps in bank system cleanup. A single week in early March registered a record weekly net purchase of ¥968 billion, roughly 10% of Japan’s national annual trade surplus in a single week. The trend shows an increase of over half a billion yen per month. A rapid reversal of foreign capital flight would undermine the economic recovery in Japan, which has far more genuine earmarks than our adrenaline-based recovery in the United States. Theirs is built upon the real economy; ours is built upon the financial speculative cancer, which erodes the American real economy. At risk in the difficult choice are Japanese exporters, who will be forced to stand tall in a harsher exchange rate environment. They might find new customers in their own land of the rising sun, where $12 trillion in savings is stored. They might find new markets up north, across the sea in China. The Japanese face a struggle. As their currency rises further, yet another deflationary factor must be dealt with. Export income will drop, but import costs will fall.

STORM CLOUDS GATHER OVER USDOLLAR

Questions have been raised as to whether the USDollar decline has run its full course. In the face of historical precedent, current financial analysis, and close examination of central bank hindrance, any claim to the affirmative is a pathetic sales pitch. A better assessment might be a display of amateurish wishful thinking. The primary function of currency adjustment is to correct the trade imbalance, to rectify the current account deficit, and to set economies on an improved path. The USDollar exchange rates, with respect to the exporting nations responsible for a trade imbalance, have shown almost no adjustment. The December through February trade gaps were announced recently to be a yawning $42.5, $43.1, $42.1 billion, some of the largest in history. What makes these figures astonishing is that they come after a 40% rise in the euro and a 10% rise in the yen over 20 months. Greenspan does not believe currency values are affected by imbalances, which is an absurd denial of basic international finance. One can safely conclude, given the ongoing trade gaps, that the great USDollar decline has not even begun. One can safely conclude, given the staggering intercontinental credit subsidies (national vendor finance programs), we are knee-deep in a monetary crisis.

China fixes a peg of their yuan currency to the USDollar, when the United States has its largest bilateral imbalance with China. Some call this peg a “Trojan Horse” sure to do damage to both nations. From an American perspective, images come to mind of a hemorrhage bleed and a device in place to block a tourniquet. One can safely conclude, given the enforced currency regime by our trade partner China, that we are in the midst of a trade crisis. Resolution to the multiple crises will surely see damage meted out by our Asian partners. A trade war will hasten the unfolding of events. Pricing power for American corporations and their product lines will return only when China enforces it (in the pipeline now).

The consumer price inflation index for March just came in at a surprising 0.5% rate. The import price inflation rang in at 0.8%. The US export price inflation hit 0.8% also, certain to dampen any export advantage. This is just the beginning. The late September article “Dragon at the Back Door” allowed me to grab credit for a correct yen breakout call. I warned that the next phase will inflict a deeper level of problems. That phase involves two stages: the near-term breakout already seen, then the upcoming move to parity.

Implications of the yen rise are being widely misread and misinterpreted as a positive event. They signal severe risk and damage. For every benefit (mainly for multi-national firms), there are 20 big harmful systemic effects (import prices). The US and Japanese central banks are losing control to free markets. The monster at the back door: imported price inflation and higher interest rates, with no repair to pricing power.

Phase #2 is when the real damage is done, when severely harmful effects are felt inside the US Economy, when the press & media are awakened from slumber, when the public outcry for government action is called for, when job loss accelerates, and when dim-witted (but politically favorable) official financial and executive decisions are made. In this more dangerous phase, watch for the USDollar and USTBonds to decline together, unlike in the initial phase. The dragon is at the back door, but few have noticed.

The primary characteristics of the damaging phase #2 will be many:

A) IMPORTED ASIAN PRODUCT PRICE INFLATION EFFECT
B) RISKS DUE TO ASIAN DEPENDENCE UPON CAPITAL AND MFG
C) ASIAN CENTRAL BANK RESERVE HEDGING RESPONSE
D) LAGGED FEDERAL RESERVE MONETARY EFFECT ON PRICE LEVELS
E) INCIPIENT TWO-SIDED PRICE INFLATION THREAT TO USTBONDS
F) LIKELY ERRORS WITHIN FED RESPONSE, DESPERATION SETS IN
G) MULTIPLICITY OF POSITIVE EFFECTS ON GOLD

A double whammy could be in store. As Asia’s powerhouses gear down, we will be forced to adjust to higher import prices. Just when material prices, energy prices, health care prices, insurance prices, and food prices are on a sharp upswing, the US Economy must next adjust to higher import prices of finished and component products from Asia. However, wages and income will in all likelihood continue to decline as businesses react to cost pressures, by sending production offshore, by outsourcing services to Asia, by laying off workers, by cutting back operations, in a struggle to survive. Despite his conceited negligent claims, Chairman Greenspan did not overcome the effects of the stock bubble and bust. Unfortunately, it takes a little longer to work out the kinks when secular deflation unleashes powerful forces. He set us up for either a tight headlock in a liquidity trap or a vicious bond backlash, by creating even larger bond bubbles. Professional pundits and participants alike are transfixed by scarce oases of resuscitation, even as they dismiss growing evidence of dangerous debt and distortion.

NEWS TIDBITS

MacDonald CEO Jim Cantalupo suffers an untimely death from an apparent heart attack at age 60, while attending an owner/operator convention. Royal Dutch Shell cuts by another 4-5% its energy reserves, prompting resignation of their CFO. Yet another settled lawsuit by Microsoft will see up to $505 million paid to Minnesota customers, who claimed the software monopolist overcharged them. Mutual fund inflows came in at $900 million last week. Broadcom was mentioned in the New York Times for outrageous transfer of wealth via stock options to executive management. The Dept of Justice has begun an investigative probe of Southwest Bell Communications. Imclone finally has surpassed its famed $60 mark, for the first time since December 2001, when the Martha Stewart fuss began. One third of the S&P500 companies, and one half of the Dow companies report earnings this week. Today, several such as Eli Lilly, Fanny Mae, 3M, Lexmark, and Wachovia weighed in.

The Leading Economic Indicators were announced at +0.3%, but readers should note that the LEI might be more predictive of the world economy than the US economy, especially Asia. The SOX and REIT stock indexes were clobbered last week. San Francisco Fed governor Parry made comments that 3.5% is a reasonable Fed Funds target rate by end of year. Fed Funds futures contracts now factor in a 28% chance of a rate hike in the June FOMC meeting, down slightly from the previous week.

In a part deux salvo, President Bush must deal with Bob Woodward’s book “Plan of Attack,” which was previewed on the televised Sunday night “60 Minutes.” Is Secy of State Colin Powell really a bit player? Spain’s new Prime Minister Zapatero made good on his pledge, ordering all their troops out of Iraq. Honolulu, San Diego, and Santa Fe were voted the nicest places in the country to live. Lastly, Timothy Cherigat became the latest in a long line of Kenyans to win the Boston Marathon. The Red Sox took 3 out of 4 from the ugly Yankees.

TODAY’S MARKET

The Dow Jones Industrials closed at 10,438 (+14), S&P closed at 1136 (+1.2), Nasdaq at 2020 (+25). TENS yield ended at 4.37% (+2 bpt). Currencies closed with Euro at 120.0 (+0.3), JYen at  92.33 (-0.62), Can$ at 74.23 (+0.12). Metals finished with gold at 400.6 (-0.8), silver at 7.205 (unch), copper at 136.8 (+1.8). Energy finished with crude oil at 37.42 (-0.29), natural gas at 5.42 (unch), unleaded gasoline at 116.5 (-0.4). Prices are at nearby futures contracts.

Jim Willie CB

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us