The Swiss Decision Could Hurt Japan
01/28/2015 12:01 am EST
Shock waves tied to the SNB's decision to float their exchange rate with the euro may have long-term implications for Japan's economic recovery says MoneyShow's Jim Jubak.
We're still adding up the fallout from the decision of the Swiss National Bank to end its defense, not really defense, its cap on the Swiss franc versus the euro.
The whole idea is that the central bank was out there and it was buying euros and selling francs to keep the franc from going above 120 euros, so that it wouldn't really kill Swiss exports, etc. But, on January 16, the bank basically said, “Oh, no more.” The theory is that they knew that the European Central Bank was going to start to depress the euro and therefore defending the euro against the franc would be incredibly expensive.
When that happened, we had this incredible event in London. The euro fell against the Swiss franc by about 40% in half an hour. Liquidity dried up; there was no trading, etc. That's the first tier effect. The question is, as this goes a little further down the road, what do we get?
Well, we've had a couple of hedge funds go out of business because they were on the wrong side of the trade. We've had a couple of foreign exchange firms that need to be bailed out by larger partners, but really the long-term effect seems to be on the yen.
This is a really big deal, because remember that the whole economic policy of Shinzo Abe and his administration has been to try to get Japanese growth up and get inflation up by weakening the yen, and instead, what we've got is, because the action has been from the Swiss National Bank has been to depress the euro and make people really afraid, you've had money flowing into yen.
The yen has gone up, which puts the whole Bank of Japan strategy into, into no man's land. It's not clear it's going to work. It is certainly clear that it is going to take more time. The question is, is the Bank of Japan going to throw more money at this, buy more, sell more yen into the market and drive down the price further and are we going to get into some kind of competitive currency weakening fight between the European Central Bank and the Bank of Japan, or, as it looks like right now, is the Bank of Japan simply going to say well we'll take a little longer?
If you're looking at the yen and the way that it sort of ripples across the world into dollar strength or not dollar strength, the yen is a safe haven currency, this is the big next question for the Swiss franc, euro debacle, which is what it's going to do to the yen and what that will do to the Japanese economy and hopes for putting an end to decades of now growth and no inflation and deflation in Japan.