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Thread: Japan's tragedy may cause worldwide economic changes

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    Default Japan's tragedy may cause worldwide economic changes

    fromhttp://www.oftwominds.com/blogmar11/thoughts-on-Japan3-11.html

    (snip)I suspect the consequences of Japan's massive earthquake will be much more transformational than most now imagine.

    Long-time readers know that I studied Japanese language, culture, literature and geography in college, and that we have many friends there.

    Thus it is not just an academic exercise for me to ponder the longer term consequences for Japan and the world as the full extent of the damage is toted up.(snip)

    (snip)Despite the many strengths of Japanese society and culture, and the tremendous reserves of talent, dedication and self-sacrifice of its people, my gut feeling is that this series of devastating earthquakes will have more enduring consequences on the world economy than most observers seem to expect.

    Japan has managed to sustain a 20-year Keynesian experiment in central government borrowing and spending "stimulus" rather than force the insolvency of its vast banking and insurance sectors. What allowed this endless piling up of debt is the people's willingness (channeled by regulations and limitations on other investments, of course) to buy low-yield Japanese bonds.

    But Japan's demographics are changing. The Baby Boom generation which sunk their prodigious savings into bonds is retiring, and instead of buying more bonds they are selling assets to fund their retirements and healthcare.

    On the surface--in public--Japan appears to be entirely stable financially. It's as if the national debt, currently about 200% of GDP, could rise to 300% or 400% or 1,000% without any consequence or breakdown. But demographics changes all sorts of things, and the added financial burdens of funding trillions of yen in rebuilding costs could push Japan's public finances over some unseen edge.

    Should Japan be unable to self-fund its ever-rising debt, then it would have to compete globally for bond buyers. Interest rates would have to rise, and that would eventually trigger a collapse in public finances, as the costs of servicing that rising debt exceeds the government's ability to borrow money.

    Japan's Status Quo--its "Establishment"--has clung on to various structural imbalances for the past two decades, refusing to threaten powerful financial and political fiefdoms with fundamental reforms. The Status Quo has played "extend and pretend" on a vast scale for an entire generation, and this has pushed Japan to a financial precipice.

    All this makes me wonder if the initial "let's work together, it can't be helped" stoicism and self-sacrifice will erode at some point and trigger a social earthquake: a sudden demand for real reforms rather than more facsimiles of reform that change nothing in the power structures of the economy and government.

    Some analysts have reckoned that Japan will consume less oil and resources in the wake of the quake, but if we look out a bit further, we see that rebuilding will require monumental amounts of energy and materials. Japan's consumption of commodities will rise, not fall.

    Though China gets all the media attention, Japan is still a critical supplier of numerous high-tech parts in the global supply chain. The Japanese global corporations have learned from experience that anything they make in China will soon be pirated, so they have withdrawn all the really high-tech manufacturing to the home islands.

    I suspect most analysts are complacent about the possible global ripple effects of these quakes, simply because Kansai and Tokyo were largely spared.

    Given its great stability and wealth, Japan seems an unlikely candidate for social or financial changes triggered by a natural disaster. I am not so sure it is immune to these forces, given the fragility of its central State and local government finances and its sclerotic Power Elites and political machinery.

    The quiet stoicism of the next few months may give way to more systemic and possibly transformational forces than most observers believe possible.(snip)

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    Default Re: Japan's tragedy may cause worldwide economic changes

    (snip)"Nouriel Roubini, the economist who predicted the global financial crisis, said the earthquake in Japan comes at the “worst time” as the country struggles to lower its budget deficit.

    “This is certainly the worst thing that can happen in Japan at the worst time,” Roubini told Maryam Nemazee on Bloomberg Television’s “Countdown” in London today. “There will be fiscal stimulus to reconstruct but Japan already has a budget deficit of close to 10 percent of” gross domestic product and an aging population.

    The Bank of Japan (8301) pledged to ensure financial stability after the magnitude 8.9 earthquake struck off the coast of Sendai, sparking a tsunami. Japanese stocks declined in Tokyo today. The central bank, which keeps its benchmark rate at zero, had last month said the world’s third-largest economy is set to recover from a fourth-quarter contraction.

    “In the short term, when you have a shock like this” it tends to produce “a weakening of economic activity,” Roubini said. “You have a slowdown in output in the same quarter but over time, if there is a massive amount of fiscal stimulus, there could be an economic recovery over the near term.”

    Japan’s Ministry of Finance said it’s too soon to gauge the economic impact of the earthquake that caused damage across the country’s east coast. The MSCI Asia Pacific Index dropped as much as 1.8 percent today.

    “Certainly it is a negative for their stock market given that it is a destruction of wealth,” said Roubini, who is also co-founder of Roubini Global Economics LLC. “Also the effects on confidence are going to be significant.” (snip)


    but from another viewpoint ... from

    (snip) Friday, March 11, 2011
    Japan: profitting from the Yen rising or dropping after the earthquake; can't have it both ways

    Unlike New Zealand's recent earthquake, the markets reaction to the quake in Japan did not cause the Yen to fall. There are many opinions out there. Some analysts opine that Japan will need to repatriate yens in order to reconstruct, and that's why the Yen actually rose today.

    However, the Yen was actually at too high levels, according to the Bank Of Japan recently. A high Yen will definitely hurt Japan's exporters, at a time when they need as much help as they can get.

    The Yen will also be key to gold prices. High yens, low U.S. Dollar, high gold, it is all intertwined.(snip)


    I tend to agree with the last assessment, that in the short term Japan's tragedy will result in a drop in energy and commodity consumption as Japanese 'infrastructure' destruction disrupts industrial production. However, in a matter of months, it's probable that Japan's consumption of commodities and energy will greatly increase as a direct result of rebuilding efforts. This will be particularly the case regarding Japan's oil / fossil fuel consumption, as Japan's lost nuclear power generation capacity cannot be replaced for several years at best.

    I also tend to agree that, given the choice of printing up Yen to pay for rebuilding ( thus devaluing the Yen, making Japanese exports less expensive but imports more expensive ) or repatriating foreign Yen investments ( i.e. selling trade surplus US Treasury bonds - increasing the Yen's valuation, making Japanese exports more expensive, but imports less expensive ) to pay for rebuilding, that they will opt for the latter. This in turn will be good for US exporters, but is likely to cause yet higher US denominated prices for all world market commodities from food and oil, to industrial metals, to precious metals.

    ~
    Last edited by Melonie; 03-13-2011 at 03:47 AM.

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    Default Re: Japan's tragedy may cause worldwide economic changes

    from

    (snip)"Today's exercise: design a semi-plausible scenario guaranteed to halt a global recovery that is entirely dependent on massive money printing, credit creation, Central Bank intervention and Central State spending.

    I don't know about your answer, but here's my scenario for kicking out the rotten posts holding up a fragile, debt-fueled global recovery:

    1. A natural disaster which disrupts production in one of the top four exporting nations, preferably one that is essential to the global manufacturing and high-tech supply chain. Once those supply chains are disrupted, then so are product cycles and profits.

    2. An event that triggers a financial crisis in one of the four largest economies. The ideal setup for falling dominoes is to take a financially vulnerable major economy and topple it with an unexpected disaster.

    3. Ignite a chain reaction of volatile mass movements in the major oil-exporting region of the world, i.e. the Mideast. I don't mean the disruptions caused by small terrorist cells, I mean the unleashing of mass movements of ordinary people who have suddenly decided to renounce the delegitimized autocracies they have accepted for decades.

    By their very nature, such movements are unpredictable, and the situation is thus intriniscally unstable--just what global markets fear.

    4. A long-wave increase in global demand for essential materials and grains which are suffering drawdowns of inventory due to inadequate supply. Throw in a few oil-rig disasters and failed crops in key regions of the world, and what might have been modest supply-demand imbalances balloon into shortages which trigger massive leaps in price.

    5. Central banks and governments which have become addicted to radical increases in money supply, sovereign debt and spending to keep their economies afloat. As the banks can't control where these stupendous injections of "free money" will go, they are helpless spectators as the money seeks fat speculative returns somewhere, anywhere--a dynamic that leads to asset bubbles and commodity inflation.

    An addiction to money and credit creation is an ideal setup for implosion: high inflation in tangible essentials generates social and political turmoil, while the stimulus acts as a "must-have" drug for the global economy: any slackening in the stimulus will trigger Cold Turkey: a rapid descent into illness and tremors.

    6. A failed Status Quo which seeks to mask its own greed, incompetence and servitude to Financial Elites and fiefdoms via propaganda, i.e. manipulating statistics, misrepresenting risk and obscuring the symbiotic relationship between the Central State and crony-cartel monopolies.

    OK, let's run through the list:

    1. Natural disaster dusrupts production in a key global exporter: check.

    2. An event which nudges a major economy into financial crisis: check. (If you don't think Japan's economy and finances will be pushed over a threshold by the quake, please be patient.)

    3. Ignite a chain reaction of mass movements in a key oil exporting region: check.

    4. Supply-demand imbalances in critical materials and grains: check.

    5. Central banks and sovereign states addicted to vast quantities of printing-money and credit creation stimulus which trigger rampant inflation in essentials: check.

    6. Massaged statistics, channel-stuffing, misrepresentation of risk and unlimited propaganda by a failed Status Quo: check.

    Does anyone seriously think the global recovery is still intact? Based on what? Does anyone think that stagnant/declining wages, falling real estate values, skyrocketing prices for materials and energy, and belt-tightening by bankrupt States are ideal foundations for higher profits?

    Anyone who doesn't realize the quake in Japan is a tragic load dumped on a fragile addict's quivering back (i.e. the global recovery) will undoubtedly be surprised by how fast the global economy will start unraveling. Anyone who kept their eyes open is only wondering how a debt and propaganda-fueled recovery lasted this long. "(snip)

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    Default Re: Japan's tragedy may cause worldwide economic changes

    Japanese 'flash crash' gaining momentum ...

    - Nikkei futures down 16%

    - BOJ intervenes on Yen exchange rate

    - big move out of Japanese investments into US Treasury bonds

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    Default Re: Japan's tragedy may cause worldwide economic changes

    AUDJPY dying - Carry trade: game over?
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: Japan's tragedy may cause worldwide economic changes

    Not just the Aussie dollar, but the New Zealand dollar, the South African Rand, and to a lesser extent the Canadian dollar. And obviously the US dollar was already being 'hit' ...

    (snip)"Goldman's John Noyce is the first FX technician with a proposed take on tonight's stunning developments. Keep in mind, he, like everyone else is in uncharted (pardon the pun) territory.

    Quick JPY Charts - Wednesday 16th March 2011

    There are two ways of arriving at a downside target of 77.75-77.56;

    * An equal size pip drop from the June ’07 high to that from the August ’98 high to the November ’99 low would target 77.75
    * The extension target of the triangle which formed from 1st November ’11 to 15th March comes in at 77.56

    The market has been below this region intraday, but, the NY 5pm close was at 77.90 according to the EBS data we use. If we were able to stabilise around 77.75-77.56 you could argue that the last part of the drop was set in an extreme situation with poor liquidity etc. definitely something to watch closely. Not to say the call was for a move this sharp in the first place, but with the help of hindsight on two counts you could argue “target met”.

    ..If.. the down move does continue the next really clean level is the actual parallel channel support off the August ’98 high which comes in at 71.70 on the linear scale chart.(snip)

    from


    As is pointed out in a fairly subtle fashion, the death of the Yen carry trade involves two aspects. The first is the fact that near zero Yen based interest rates has served as the basis for 'cheap credit' in lots of different currencies for a very long time - but with Yen now returning to Japan those Yen, and the low interest rate credit they made possible, are causing liquidity to dry up and interest rates to rise. The second is obviously the effects of exchange rate moves in other currencies and the associated effect on world market commodity prices denominated in those currencies.

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