Psst: The Currency War Is a Secret

02/26/2013 11:00 am EST


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. While it will not matter in much of the automobile market—it’s not like Thailand or Indonesia have native car makers that will be put out of business by this weak yen—it will create havoc for countries like Singapore and China, whose high-tech industries compete directly with struggling Japanese former titans like Sharp (SHCAY), Panasonic (PC), and Canon (CAJ).

So while Toyota (TM), Honda (HMC), and Suzuki (Tokyo: 7269) will enjoy even more dominance in emerging markets like Thailand, Malaysia, and Indonesia, they will not be making many friends in India. Mahindra (India: MAHM), Maruti (BSE: 532500), and Tata (TTM) will all now have a much harder time realigning themselves, with the repeal of the diesel subsidy.

It seems the US values blunting the rise of China more than its own auto industry, because in every market where Japanese cars are important—the US, China, Southeast Asia—US cars are as well. The situation for struggling European car makers like Peugeot and Citroen in Europe will become even more tenuous, as the cheaper yen combined with the strengthening euro will crowd them even farther away from the market.

If you don’t think Europe—and especially countries like France—will not press for some form of retaliation for this, you are kidding yourself. The UK is joining the Japanese party here to put the squeeze on Europe, with the pound weakening quickly since the beginning of the year.

In all of this, the yuan has remained relatively strong, within 0.5% of its all-time high versus the US dollar. Since the Chinese are still running a strong current account surplus and have a huge stash of US Treasuries they are not all that keen on holding forever, expect them to recycle as many dollars as they can into strategic assets like gold, oil, and claims to extract them.

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