FX FUNDAMENTAL ANALYSIS Chart 1: Demographic crunch will intensify fom here
It is almost impossible to generate real economic growth when the working age population is set on this downward path. Older people consume and save less which is not beneficial for either consumption,
investment or
for financing the government. Chart 2 shows how unsustainable the Japanese Government’s finances are. Interest costs are rising, even with borrowing costs at near record lows, because the overall debt is so large. It
is almost impossible to imagine that fewer workers (i.e. taxpayers and Source: UN, SG Cross Asset Research
consumers) can support ever more social security and interest payments.
Without GDP growth, Government debt could spiral out of control as can be seen in the Japanese Ministry of Finance’s own data in chart 3. It is clear that the simplest way to generate growth will be via inflation – hence a weaker Yen is essential.
In the business world, an important event occurred in October 2012 that may have forced a change in Japanese
Government policy and provided a catalyst for this aggressive new policy set. Soſtbank (a Japanese Telecom and Internet company) announced a US$20 billion investment into Sprint, the third largest US telecoms carrier. At that time, it would appear that corporate Japan saw very little opportunity for domestic investment. Te industrial and electronics sectors (which Japan has been built on) have followed a similar thought process; looking at a domestic economy with zero growth potential and a relatively high cost base because of the extraordinarily Business
concluded
strong currency. then
that
they must plan to cease domestic production and seek to move this abroad. Tis makes perfect business sense which must have forced the hand of the Government to build a consensus for policies designed to weaken the Yen.
As can be seen in the monthly chart (chart 4), the US Dollar fell from 270 to 79 against the Yen over the last 30 years. Tis made US assets very cheap, and production in Japan very expensive. A weaker Yen will help Japan significantly. However, we are not talking about a move from 79 to 104 (the high seen recently). If the Japanese authorities can print enough money and persuade their international colleagues that a weaker Yen is in everybody’s interest, the Yen can weaken and the Dollar strengthen to 120 and beyond.
Chart 2: Japanese Government Finances - in a hole that’s getting bigger 12 FX TRADER MAGAZINE January - March 2014
So what has happened over past year? Japanese Prime Minister
the
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