Tuesday, January 30, 2007

Yen Undervaluation Causing Increasing Distortions

Today's economic statistics from Japan were mixed. Industrial production were stronger than expected while consumer spending were weaker than expected. The explanation for these seemingly contradicting statistics is of course the extreme undervaluation of the yen, which have just gotten worse since I first wrote about it. While European currencies and the Chinese yuan and most other Asian currencies have strengthened against the dollar since then,the yen have kept falling even against the dollar (and of course even more so against European and most other Asian currencies).

The weak yen will depress local purchasing power in Japan, while boosting net exports, As a result, Japan's trade- and current account surplus have continued to rise. Note however, that contrary to the misleading "unit labor cost" economics of The Economist, the weak yen have not boosted overall economic growth, just shifted it from domestic demand to net exports. As this shift is very unnatural, it will in fact create economic distortions both in Japan and elsewhere.

Meanwhile, European leaders are starting to complain, noting that Japan's monetary policy creates as much distortions as China's. An increasing number of investors -both Japanese and gaijins- are borrowing at the super-low nominal interest rates in Japan and using it to invest in far higher yielding investments elsewhere.


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