Insights & News
Japan’s Deflation Solution: Monetary Easing or Currency Devaluation?
“Shinzo Abe, the incoming prime minister of Japan, declared his intention to counter currency devaluation attempts by the U.S. and Europe by also weakening the Yen,” says Ron D’Vari, CEO and Co-Founder of NewOak Capital.
“The Bank of Japan (BOJ) is also considering a price stability target and mentioned a program to provide money at very low rates to banks to increase their loans with the hope to stimulate growth. The U.S. and Europe have been pursuing aggressive monetary policies attempting to stimulate their economies, by buying bonds and increasing the Dollar and Euro money supply. Yet, others like South Korea, have intervened directly in currency markets. This has pushed Yen-to-Dollar as low as mid 80′s.”
“There inevitably would be a currency war starting if most developed countries try simultaneously to print money, follow expansionary policies, and also target to devalue their currencies. Japan deflationary pressures are already strong so it is understandable that Japan would try to defend its currency, and not go too far below 85 Yen/Dollar.”
“A stable, albeit strong, yen is what Japan could best hope for. Currency interventions are not known to be effective and we don’t expect Japan to actually engage in them unless yen strengthens beyond ¥80/US$. Therefore, given most of the developing countries will be easing, we expect yen to stay in a range near its current ¥85/US$. As to a revival of growth in Japan, we may all have to wait.”
No Shortage of Cliffs: Are Folks Ready to Act?
“The Fiscal Cliff is the 800 pound gorilla in the room, yet beware other ‘cliffs’ threatening to hit our economy and the consumer if actions aren’t taken by the end of the year,” warns James Frischling, President and Co-Founder of NewOak Capital.
“Below this potential colossal failure of our government and the economic impact it would create lies other, albeit smaller cliffs, that also threaten to impact our fragile recovery.”
“After watching the costly disruption caused by the strike at West Coast ports, we’re now only days away from the ‘Container Cliff’ which would result in the closing of 15 ports from Massachusetts to Texas if an agreement isn’t reached. The two sides postponed their labor dispute earlier this fall by agreeing to an extension, but the deadline to reach an agreement is December 29th.”
“Closing these ports would directly hit to the manufacturing supply chain and, in addition to the shipping and trucking businesses, would impact large and small retailers. President Obama is being urged to step in to invoke provisions of the Taft-Hartley Act, but it’s not like his hands aren’t full with House Speaker Boehner and the Fiscal Cliff.”
“Moving down the ‘cliff curve’, we’re also facing the ‘Milk Cliff’ that would take place if a farm bill isn’t reformed by Jan 1st. Failure to act in this instance would essentially cause the price of milk to double.”
“With no shortage of ‘cliffs’ tied to the final days of 2012, its clear there’s still a lot of work to be done. Let’s hope the powers that be are still ready, willing and able to get the job done.”