Battles of the Yen-Charting Around Asia

Know the smallest things and the biggest things, the shallowest things and the deepest things. As if it were a straight road mapped out on the ground ... These things cannot be explained in detail. From one thing, know ten thousand things. When you attain the Way of strategy there will not be one thing you cannot see. You must study hard. Miyamoto Musashi, Go Rin No Sho, circa 1645

The Book of Five Rings (五輪書, Go Rin No Sho) is a text on kenjutsu and the martial arts in general, written by the Samurai warrior Miyamoto Musashi circa 1645. It is considered a classic treatise on military strategy, much like Sun Tzu's The Art of War. There have been various translations made over the years, and it enjoys an audience considerably broader than only that of martial artists. Modern business leaders find its discussion of conflict and taking the advantage, to be relevant to their business life. As a Samurai, the code and precepts of Bushido were inherent in Musashi’s being, and his final literary work The Dokkodo, 独行道; "The Path of Aloneness" or "The Way to be Followed Alone", sets out his 21 rules for life and death. He called them “Precepts” and they epitomise the way of Bushido, the warrior’s code. It expresses a stringent, honest, and ascetic view of life.

In modern Japan, the great Samurai families no longer have the power of old but the spirit of Samurai and the code of Bushido are deeply embedded in Japanese culture. Bushido's ethical foundations still play a major part of Japanese culture and society. Bushido's stress on loyalty to the head of a group is still evident in the strong sense of loyalty workers have to their employers, students to their teachers, apprentices to their masters and to their country.

The Japanese also have a term "Business is war" which relates to bushido.

To understand modern Japan, understand Bushido. To understand the movements of the Yen, understand that it is a weapon in the ceaseless war of commerce, played out between great nations. For today’s currency warriors, the lessons of history are ageless.

In this unusual juxtaposition of Yen (yellow), Dollar (black), Pound (red) and Euro (light blue) in our multi coloured chart following, we see the final death of the Pound as it succumbs to the artless buffoonery of Prime Minister Gordon Brown’s attempts to position himself as a global master of the black arts of fiscal and monetary policy in an antithetical succession to his years as Britain’s Chancellor of the Exchequer (Treasurer), when the seeds of the Pound’s demise were laid. As an unelected apparatchik of New Labour’s awful threesome (Blair, Brown and Mandelson), the virtues of Blair’s mandate as a genuinely elected leader are lost in the sleazy backroom deals that handed power to this strange, beleaguered individual who has appointed another unelected power broker, Peter Mandelson to the Peerage, to continue the peculiar power that this trade union journalist, come European Commissioner for Trade has exerted on Britain’s left for many years.

The querulous cries of Tata, the Indian steel giant, which only in March this year, paid .3 billion to Ford, for the dubious distinction of owning two of the most overpriced and overrated automotive brands on the planet, Jaguar and Range Rover, and are now holding out the begging bowl to their UK political masters for a .5 billion bailout, is testimony to the failed policies of Brown and his followers. And they are by no means alone as US, Canada, France and Australia have already bowed to, or promised support for the ludicrous, but employment intensive business called the automotive industry.

I find it amusing that the conservation/environmental debate is always framed in ways that demand more. More energy, more efficiency and more employment, when the biggest and most obvious source of pollution is the 625 million cars circling the planet and emitting noxious gases with every cylinder stroke. And yet, the very same industry is the most strongly supported by governments of every hue and the most heavily subsidised.

In Australia where General Motors (Holden) and Ford share a virtual vehicle manufacturing monopoly, over 70% of their sales are classified as “fleet” sales, that is they are ostensibly for business purposes. For these vehicles, effective 100% tax deductibility for capital and operating costs apply. This skewed distribution is similar in most industrialized nations. Absent this special tax status, no vehicle manufacturer would survive. So, we are led to the inescapable conclusion that the primary source of our world’s greatest pollution and degradation is a direct result of conscious and deliberate government policy to aid, abet and massively subsidise the worst polluters. I bet you haven’t heard that argument before. But that, like many of your humble scribes musings, is a story for another day!

In the many coloured chart we see the birth and rise of the Euro, the death spiral of the Pound and the awful debasement of the Dollar post 2001 which masks its pre 1986 plunge, but since then the hegemony of the Yen has always been evident.

Timing is important in dancing and pipe or string music, for they are in rhythm only if timing is good. Timing and rhythm are also involved in the military arts, shooting bows and guns, and riding horses. In all skills and abilities there is timing.... There is timing in the whole life of the warrior, in his thriving and declining, in his harmony and discord. Similarly, there is timing in the Way of the merchant, in the rise and fall of capital. It is especially important to know the background timing, otherwise your strategy will become uncertain.

The background timing for our present conflict lies in the nature of the great trading blocks of our world. US and UK are characterised by a voracious appetite to consume, untrammeled by savings which in these countries have been negative for years. This behaviour has been mimicked by capital constrained countries such as Iceland, most of the Baltic (Eastern European) states and the lands Down Under. For these beggars the capital has been supplied by the savers, principally China and Japan. In the game so far, the West has arbitraged its factories and technology for labor. Or as Business Spectator puts it:

In economic terms, the relationship between China and the US has been a simple one over the last decade. America transferred vast chunks of its manufacturing capacity to China and the Chinese (plus the Japanese, Koreans and others) lent America the money to buy their imports. But the collapse of the American banking system changed the rules. China must now stimulate its own economy. It will face enormous pressure from the US and Europe to increase its clamps on carbon. China, Japan and Korea want to spend more money on stimulating their own economy yet if they don’t also fund the American stimulus package and the US is forced to simply print money instead the American dollar will fall dramatically which will substantially reduce the value of the money they have already ploughed into the US.

I don’t agree with Robert’s comments on carbon, as governments everywhere are finding expediency triumphing over vision and leadership, a not uncommon situation. Japan before others, was aware of the arbitrage into China’s workforce and is by far the largest foreign investor in China’s industry, so with China’s Yuan, systemically weakened and pegged to the Dollar, the positioning of the Yen, levers not only Japan’s exporting muscle but much of China’s manufacturing sector as well. Right now, the timing for the unwanted strength of the Yen and the sudden weakness of the Dollar is a major threat to the land of the rising sun.

In strategy your spiritual bearing must not be any different from normal. Both in fighting and in everyday life you should be determined though calm.

For Japan, a nation that forswears consumption and adheres to savings and rectitude, the path forward rests with their exporters as all efforts to stimulate domestic consumption in a meaningful way have proved fruitless. The present reduction in consumption in their traditional markets of US and UK is having an immediate affect on their powerful exporting companies. Honda has cancelled their commitment to that most profligate of all asinine sports, Formula 1 car racing, and with that warning, Bernie Ecclestone has proposed a reduction for team annual budgets from 0 million to perhaps half that amount. Like the bankers they will avow nothing and yield nothing. Only when leadership enforces sobriety (or is it celibacy) will the curse be broken.

From Bloomberg: Toyota Motor Corp., the world’s second-largest automaker, forecast its first operating loss in 71 years on plummeting demand. The carmaker will post a 150 billion yen (.7 billion) loss in the year through March. “The environment we’re in is extremely tough,” President Katsuaki Watanabe told reporters today in Nagoya. “We’re facing an unprecedented emergency situation. Unfortunately, we can’t see the bottom.”

The automaker lowered its net income forecast 91 percent.. The last time Toyota posted an operating loss was in the year ended March 1938. Automakers worldwide are cutting production as sales plummet.

Suzuki Motor Corp., Japan’s second largest minicar maker, today said it will cut domestic production by an additional 30,000 units to 1.16 million vehicles for the year ending March 31. Daihatsu Motor Co., Toyota’s minicar unit, said it will cut Japan production by 16,000 vehicles in the period. Japan’s exports plunged 26.7 percent last month from a year ago, the most on record, as global demand for cars and electronics collapsed. Shipments to the U.S. slid an unprecedented 34 percent, the Finance Ministry said.

Compounding the drop in demand is the stronger yen, which erodes overseas profits for Japanese automakers. Every 1 yen gain against the dollar and euro trims Toyota’s annual operating profit by 40 billion yen and 6 billion yen, according to the company. The carmaker is basing its second-half earnings outlook on 93 yen to the dollar and 123 yen to the euro. The company expects a stronger yen will cut its operating profit by 200 billion yen for this fiscal year from its November forecast.

Your attitude should be large or small according to the situation. Upper, Lower and Middle attitudes are decisive. Left Side and Right Side attitudes are fluid. Left and Right attitudes should be used if there is an obstruction overhead or to one side. The decision to use Left or Right depends on the place.

The USD is testing decade lows in the Yen cross. With China’s currency permanently undervalued courtesy of the Dollar peg, does the sudden weakness in the Dollar herald a race to the bottom? Many think so. We have to go back to 1995 to find comparable weakness, as the USD-JPY cross, tests the famous Danielcode black line at 87.172. Interestingly, many markets from Equities to Oil have made the same journey. US T Bonds has surpassed its black line. What is the entente cordiale between currency strategists in US and Japan. How far does the quid pro quo for Japanese access to US markets stretch? These questions are at the heart of the ongoing battles of the Yen.

As one man can defeat ten men, so can one thousand men defeat ten thousand. However, you can become a master of strategy by training alone with a sword, so that you can understand the enemy's stratagems, his strength and resources, and come to appreciate how to apply strategy to beat ten thousand enemies.

Bank of Japan Governor Masaaki Shirakawa said yesterday (Bloomberg), that a strong yen will have a negative effect on economic growth in the short term, and added that foreign exchange rates are one important factor influencing the economy. He said the central bank sets interest policy based on an overall assessment of the economy. He declined to comment on when Japan should intervene in the currency market, saying that decision is solely up to the Finance Ministry. a public forum hosted by the central bank. Separately, the Bank of Japan cut its assessment of the economy, using the language “deteriorating” for the first time since 2002. Shirakawa said exports will probably decline significantly because of the yen’s strength and the global slowdown. Japan’s exports plunged the most on record in November, a government report showed today.

These things cannot be clearly explained in words. You must research what is written here. In these three ways of forestalling, you must judge the situation. This does not mean that you always attack first; but if the enemy attacks first you can lead him around. In strategy, you have effectively won when you forestall the enemy, so you must train well to attain this..

Whatever Japan does to shelter its exporters will not be done in the harsh light of day. Rather it will be done by stealth and strategy. In 2006 Merrill Lynch stated “All liquidity starts in Japan, the world’s largest creditor nation.” Bloomberg columnist William Pesek Jnr, opined in February 2006 that what makes the carry trade so worrisome is that nobody really knows how big it is. “For example, the BOJ has no credible intelligence on how many hedge funds, investors and companies have borrowed cheaply in ultra-low-interest-rate yen and re-invested the funds in higher-yielding assets elsewhere.
Nor are the Bank for International Settlements, Federal Reserve Bank of New York or the International Monetary Fund likely to know how much leverage this most popular of trades has enabled banks to build up. Ditto for regulators overseeing the dealings of portfolio mangers around the globe.
During the past decade, the yen-carry trade has become a staple for many punters. A popular form of the strategy exploits the gap between U.S. and Japanese yields. Anyone borrowing for next to nothing in yen and parking the funds in U.S. Treasuries received a twofold payoff: the 3-plus percentage-point yield difference and the dollar's rise versus the yen. The latter dynamic boosts profits by the time they're converted back to yen. Realization the trade is moving against investors may send shockwaves through global markets. It would start slowly with speculators suddenly closing positions that are becoming more expensive: dumping Treasuries, gold, Shanghai real estate, shares in Google Inc. or whatever else they used yen borrowings to bet on. The chain reaction would accelerate once the mainstream media jumped on the story.” Prescient indeed.

To add strategy or to further apply Musashi’s dictum to lead the enemy around, size and scope of the carry trade are deliberately obscured. In March 2007, Reuters reported that defining the size of the yen carry trade remains an elusive art, despite the fact it has drawn so much comment, sparked so much debate and been cited as a major factor behind global market upheavals. Japan's top financial diplomat guessed that investors might have borrowed anywhere between and 0 billion dollars, to buy higher-yielding assets.

Some market estimates suggest a figure in excess of 0 billion. But because there's really no way of knowing for sure how big investors' bets against the low-yielding yen really are, Hiroshi Watanabe's guess may be as accurate as any, but the evidence is against him. Mr Watanabe would be well aware that tiny New Zealand, a country of about 4 million people had borrowed at least billion on the London sourced but Yen funded Uridashi trade alone. That’s what fueled the great Down Under property bubble, now running about 16 months behind the US timeline but threatening a center stage performance in the new year.

"In the void is virtue, and no evil. Wisdom has existence, principle has existence, the Way has existence, spirit is nothingness."

The Yen has opponents other than the Dollar. There is always that pesky Euro to contend with. Germany has fully 20% of its economy invested in some part of the auto industry. The challenge from Japan’s auto exporters is another vital struggle. Since July, the Euro has weakened significantly against the Yen, resuming it’s long term depreciation. In two quarters it has expunged almost seven years of gains.

Currencies are the shock absorbers of commerce, taking the strains and stresses when policy fails to adjust. Currencies are the truest mark-to-market indicator, and the most transparent. Like all markets there is a degree of manipulation by central banks and governments but the shocks at present are so outrageous that all accepted rules are going out the window.

How the BOJ will reposition the Yen within its acceptable limits, sets the stage for the next confrontation of the financial diplomats. Beneath the niceties there is a war going on, worthy of the most complex Musashi plot.

In the void too is the public purse. Japan, skilled over two decades in the tragedies of Zero Interest Rate Policy, ZIRP, and the debacle of Quantitative Easing, now about to be emulated by the US Fed, shows us again that at the end of the slippery slope are only more slippery slopes.

Bank of Japan Governor Masaaki Shirakawa said the central bank needs to focus on making funds available to companies since the benchmark interest rate is close to zero. “Given that the interbank overnight rate is so low, the focus needs to be placed on how to improve the availability of funds and alleviate the cost of corporate borrowing,” Shirakawa said today at a business meeting hosted by Keidanren, Japan’s largest business lobby.

The central bank offered to buy commercial paper, or short- term corporate securities, outright for the first time. The step is aimed at making it easier for companies to issue debt and ease a credit crunch before the fiscal year ends on March 31. Shirakawa repeated that purchasing corporate debt and assuming credit risks of companies on its balance sheet is an “exceptional step taken by a central bank.” “If a central bank directly assumes companies’ credit risk, that would be taking over the business of private financial institutions,” Shirakawa said. The role of a central bank is to “indirectly support” lending by providing “liquidity through money market operations by making corporate debt eligible as collateral” for commercial banks, he said.

That certainly isn’t the understanding of the US Fed Governor and US Treasurer who are in the “whatever it takes” camp. Of course, the burden of “whatever” is always on the back of others.

These are the Precepts of Musashi, that personify the Way of Bushido. It is precious and commendable knowledge: Accept everything just the way it is; Do not seek pleasure for its own sake; Do not, under any circumstances, depend on a partial feeling; Think lightly of yourself and deeply of the world; Be detached from desire your whole life long; Do not regret what you have done; Never be jealous; Never let yourself be saddened by a separation; Resentment and complaint are appropriate neither for oneself or others; Do not let yourself be guided by the feeling of lust or love; In all things have no preferences; Be indifferent to where you live; Do not pursue the taste of good food; Do not hold on to possessions you no longer need; Do not act following customary beliefs; Do not collect weapons or practice with weapons beyond what is useful; Do not fear death; Do not seek to possess either goods or fiefs for your old age; Respect Buddha and the gods without counting on their help; You may abandon your own body but you must preserve your honour; Never stray from the Way.

As most of you await deep winter, it is summer Down Under, the time at which this weary scribe can be refreshed by a white sand beach, hot sun, surf, the largest fresh water lake in the Southern hemisphere and lashings of ice cold beer. What, I ask, could possibly be better.

To the Financial Sense family all over the world, and wherever you are, I bid you the Compliments of the Season. It has been a rare privilege and honour to write for you this past year. More adventures await us, and the Danielcode, in the financial jungles in 2009.

Mat 11:25 At that time Jesus answered and said, I thank You, O Father, Lord of Heaven and earth, because You have hidden these things from the sophisticated and cunning, and revealed them to babes. Mat 11:26 Even so, Father, for so it seemed good in Your sight.

Copyright © 2008 John Needham

About the Author

Lawyer and Financial Consultant
jneedham [at] thedanielcode [dot] com ()