Psst: The Currency War Is a Secret


Tom Luongo Image Tom Luongo Contributor, LiveWire Market Blog

Tom Luongo of the LiveWire Market Blog explains why Japan’s devaluation of the yen is harmful for its trading partners...and eventually, and most of all, itself.

The G20 spent a lot of time trying to talk down the idea that they were doing anything other than holding hands and singing “kumbaya” last weekend, when nothing could be farther from the truth. The devaluation of the yen has caused major ripples in the global economy, which ultimately will benefit almost everyone except Japan.

Japan is trading a short-term boost in exports for what’s left of the stability of their banking and bond markets. But they were able to launch this phase of the currency war—which doesn’t exist if you read G20 press statements—because of an extremely strong market for Japanese government bonds brought on by the mixture of a strong yen and strong corporate balance sheets.

GDP growth was slow, but the real Japanese economy was growing nicely. The CPI was low and had been low for ten years. Japan was the poster child for a strong currency creating real, if slow growth.

The strong yen was creating a boon for an economy that lives and dies based on its ability to import energy, especially now in the wake of the disaster at Fukushima. Oil and natural gas import costs were kept low, allowing Japanese importers to always be able to bid supply away from currency debasers.

Strong corporate balance sheets gave Japanese companies the ability to redeploy US and European assets repatriated after Fukushima—buying up premium assets at effectively cut-rate prices

Now they have gone on a print-fest—effectively going to war with all of their recently-cultivated trading partners.