LONDON May 10 Most investors see the yen's
latest lunge as a byproduct of the rich world's money printing
gambit and not a deliberate escalation in a notional currency
war, but it is raising concerns about possible new ructions.
The yen slid to a 4-year low on Friday, adding to
losses of more than 20 percent against the dollar in the last
six months as Japan's Prime Minister Shinzo Abe applies an
aggressive monetary and fiscal expansion to try and jump start
his moribund economy.
Significantly, the dollar/yen exchange rate popped above the
psychologically important 100 rate that had capped it for weeks.
Even before Friday's moves regional export competitors were
already struggling to keep their currencies competitive with the
yen via open market intervention or domestic interest rate cuts,
as in the case of South Korea on Thursday.
Although clearly uneasy about sharp exchange rate movements
of any sort, Japan's allies in the Group of Seven economic
powers meeting near London on Friday broadly repeated their
stance that undirected currency moves resulting from appropriate
central bank policies were acceptable.
Given most of rests of the G7 are also engaged in similar
forms of money printing, that may be unsurprising. But the green
light was also flashed last month by the broader G20 grouping
that includes the big developing economies too and an escalation
of diplomatic rows over the issue seems unlikely.
So have the warnings of Brazil and other emerging nations
over recent years of imminent currency wars - whereby western
economies crippled by the credit crunch purposely devalue their
currencies for growth-boosting trade gains - missed the point?
Most global investors now doubt currency targetting per se
is the prime driver for the yen. The sequencing of gigantic
central bank bond buying and money printing is much more
dominant in leading currency moves, even if that may well have
similarly disruptive effects on developing economies over time.
"I wouldn't use a term like currency war. What the market is
assimilating and pricing and reacting to are central bank
policies," said Scott Thiel, head of European and Global bonds
at the world's biggest asset manager, BlackRock - which has
almost $4 trillion in assets under management.
Thiel, who expects the yen to fall further and described 120
per dollar as a reasonable view over the next year, said today's
move was as much to do with the dollar side of the equation.
With relatively upbeat U.S. economic data, the cheap
domestic energy boost from the shale story and the prospect of
U.S. corporate repatriation flows, he said, the dollar was set
to benefit from the fact that the U.S. Federal Reserve would be
first to wind down its QE program.
"In terms of the sequencing of QE, the Fed will be first and
the Bank of Japan will be last."
QE SWAMP AND EMERGING MARKETS
Direction then, rather than conviction in any equilibrium
currency prices or fair value, is seen as the big driver.
"We have to take a deep breath and realize that the level of
intervention has never been this great - it is absolutely
enormous," said Thiel. "There's just no time in history when
this has been so massive and therefore to trying to assess the
value currencies is challenging."
Others agree that Japan is ostensibly playing by the rules
set out by the G20 and International Monetary Fund.
"If the market prints 100 or 200, G7 or G20 cannot do much
because they are abiding by the guidelines," said Stephen Li
Jen, founder of the eponymous hedge SLJ Macro.
Dan Morris, global strategist at JPMorgan Asset Management,
said the yen fall may hurt Korean and German exporters, although
the latter was likely to be used to coping with strong currency
and, more broadly, the yen was merely correcting excess,
"It's on the fundamentals, it's viable - the yen was just
way too strong before," he said, adding 100-120 was comfortable.
Marc Chandler, head of currency strategy at Brown Brothers
Harriman in New York, said G7's was less concerned about what
was going on between their economies than within them.
"The main fissure is within countries and that has taken the
form of austerity."
But even if this is not some stepped-up currency war per se,
the effect of rich country money printing over recent years has
been to flood smaller emerging economies with investment capital
seeking higher bond returns than the zero or even negative real
rates on offer in home markets.
Jitters about a reversal of these flows are rising as many
mull the possible end of the whole process if the Fed starts to
wind it down over the next year.
And an accelerated yen fall, which some say mirrors the
lead-up to Asian and emerging markets crisis in 1997, could
exaggerate that problem if Asian policymakers are forced into
pushing interest rates ever lower toward western levels just to
keep their exporters competitive with Japan's.
While the circumstances in many emerging markets are much
different to 1997 - fewer currency pegs, better balance of
payments accounts and much higher foreign cash reserves - the
scale of foreign investment flows is much higher, too.
"The amount of capital that has come to these countries is
substantially larger now, so you have a lot more kindling than
before and all it needs is a spark," said Jen, adding the most
likely trigger was still set to be as much the winding down of
U.S. money printing than the start of Japan's.
"That makes the risk of a repeat of 1997/98 difficult to