coming from Japan’s opposition party — which isn’t exactly steaming ahead towards victory

TO BE NOTED: From Alphaville:

"Samurai-ed: Japan ‘would avoid dollar bonds’ Posted by Tracy Alloway on May 13 10:12.

Japan voiced some anti-dollar/US Treasuries remarks and a future preference for samurai bonds late Tuesday.

From the BBC:
Japan’s opposition party says it would refuse to buy American government bonds denominated in US dollars, if elected.

The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar. Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.

But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.

Yen-denominated bonds would effectively mean that the US is exposed to the risk of future falls in the value of the USD rather than Japan. That’s a pretty big policy shift for Nippon, which has been a strong buyer of US Treasuries - and, taken with comments coming out of China, hints at a growing unease in Asia over the USD’s supremacy.

But, as the BBC story notes, this is coming from Japan’s opposition party — which isn’t exactly steaming ahead towards victory. Nakagawa’s comments have also been toned down since his interview with the BBC, and there is, as often happens with Japanese politics, undoubtedly a dose of anti-gaijin political rhetoric in the above. BarCap has a good summary:
Masaharu Nakagawa, the “shadow” finance minister of Japan’s largest opposition party, the Democratic Party of Japan, was quoted by BBC on 12 May saying that his party would shun buying US bonds denominated in dollars if his party took the reins of government as a result of Japan’s upcoming lower house election. In an interview with Bloomberg News on 13 May, however, Mr. Nakagawa clarified that it would merely be one option for Japan to propose that the US government issue samurai bonds (US bonds denominated in yen), and that this was strictly his personal proposal and would not necessarily be implemented immediately by the party if it took the helm. The comments, while perhaps reflecting a genuine concern shared by other world leaders, would also serve to boost Mr. Nakagawa’s nationalist credentials ahead of the election and, we believe, should be viewed primarily in that context. Japan’s lower house election must be held by this September, but could be called earlier if the prime minister decides to dissolve the lower house prior to that time.

The samurai will be waiting for a while, it seems.

Related links:
Samurai bond market revives - FT
China to US: We hate you - FT Alphaville
We ‘hate you guys’ even more now… - FT Alphaville

This entry was posted by Tracy Alloway on Wednesday, May 13th, 2009 at 10:12 and is filed under Capital markets, People. Tagged with china, Dollar, japan, Treasuries, yen."

Improved investor risk-appetite may continue to weigh on the ‘safe haven’ yen

TO BE NOTED: From Bloomberg:

"Yen Falls as Speculation Global Slump Easing Spurs Yield Demand

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By Ron Harui

May 4 (Bloomberg) -- The yen fell for a fifth day against the euro, its longest losing streak in six weeks, and slid against Australia’s dollar as speculation the global recession is easing encouraged investors to buy higher-yielding assets.

The dollar traded near a three-week low against the euro before a German report today that may show retail sales in Europe’s largest economy rebounded in March, sapping demand for the greenback as a refuge from the worldwide slump. The yen declined for a fourth day versus South Korea’s won as Asian nations will create a $120 billion foreign-currency reserve pool by year end to bolster confidence.

“The market wants to put some of the risk trade on that they took off toward the end of last week,” said Greg Gibbs, a currency strategist at RBS Group Australia Ltd. in Sydney. “The market is seeing confidence in the global recovery and hence the dollar is trending lower.”

The yen dropped to 132.43 at 9:19 a.m. in Singapore from 131.54 in New York on May 1, after earlier falling to 132.45, the lowest since April 14. Japan’s currency fell to 99.33 per dollar from 99.11. The dollar traded at $1.3315 per euro from $1.3273 in New York on May 1. It reached $1.3386 on April 30, the weakest since April 13.

Japan’s currency dropped 1 percent to 12.81014 won from 12.94456 in New York on May 1. It earlier touched 12.78274 won, the lowest since Nov. 5. The yen declined 0.9 percent to 73.03 per Australia’s dollar and fell 0.9 percent to 57.04 against New Zealand’s dollar.

The volume of currency trading is likely to be less than normal because of Japan’s “Golden Week” holidays from today to May 6, Gibbs said.

German Retail Sales

The yen approached its lowest versus the euro in almost three weeks. Germany’s Federal Statistics Office in Wiesbaden may say today that retail sales, adjusted for inflation and seasonal swings, rose 0.2 percent in March from February when sales fell 0.2 percent, a Bloomberg survey of economists showed.

“Recent economic reports suggest the global recession is abating in intensity,” said John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney. “Improved investor risk-appetite may continue to weigh on the ‘safe haven’ yen.”

Europe’s economy may be moving past the worst of the recession, data last week indicated. Confidence in the euro area increased for the first time in 11 months in April, the European Commission said, while Germany’s Ifo business confidence index rebounded from a 26-year low.

The yen dropped versus all of the 16 most-active currencies as Asian equities and U.S. stock futures rose. The MSCI Asia- Pacific Index of regional shares Index climbed 0.6 percent and the Standard & Poor’s 500 Index futures advanced 0.5 percent.

Futures Traders

Futures traders pared their bets that the yen will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 4,579 on April 28, compared with net shorts of 13,695 a week earlier. The figures are sometimes used as a contrary indicator.

Benchmark interest rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 3 percent in Australia and 2.5 percent in New Zealand, making the South Pacific nations’ assets attractive to investors seeking higher returns.

The yen also fell as the Association of Southeast Asian Nations, together with Japan, China and South Korea, will use the $120 billion in funds in times of turmoil. They will set up a surveillance unit that will identify risks to the region and provide oversight of the fund. Japan also offered $60 billion of yen-denominated swap facilities.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net"

“That is largely reflected in increased risk appetite.”

TO BE NOTED: From Bloomberg:

"Yen Weakens Above 100 per Dollar as G-20 Aid Saps Safety Demand

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By Theresa Barraclough and Ron Harui

April 3 (Bloomberg) -- The yen weakened to above 100 per dollar for the first time in five months as the Group of 20 nations pledged to revive economic growth and on speculation the Federal Reserve will step up efforts to counter the U.S. slump.

The yen also fell to a five-month low against the euro and the Australian dollar as stocks rallied, increasing demand for higher-yielding assets. The euro is poised for a weekly gain against the dollar on speculation a European Central Bank official will signal the bank is done cutting interest rates after yesterday lowering them by less than economists expected.

“The market thinks the world is suddenly a better place,” said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. “That is largely reflected in increased risk appetite.”

The yen touched 100.18 per dollar and traded at 99.71 as of 10:55 a.m. in Tokyo, after falling 1 percent yesterday. Japan’s currency weakened to 134.04 per euro, from 133.98 yesterday in New York, when it dropped 2.6 percent, the most in five weeks. The yen is set for a 3.1 percent slide versus the euro this week.

Europe’s single currency traded at $1.3446, up 1.2 percent this week. Australia’s dollar rose to 71.39 yen, after reaching 72.33, the highest since Oct. 21, as a report showed the nation’s services industry shrank last month at a slower pace. The New Zealand dollar advanced to 58.43 yen, after reaching 59.03, the highest since Nov. 10.

Group of 20

The yen weakened against all 16 major currencies this week as world leaders agreed on measures to fight the global recession.

Policy makers from the Group of 20 nations called for stricter limits on hedge funds, executive pay, credit-rating firms and risk-taking by banks. They also tripled the firepower of the International Monetary Fund and offered cash to revive trade to help governments weather the turmoil resulting from the surge in unemployment.

“The G-20 summit could mark a turning point in the global financial crisis,” wrote analysts led by Callum Henderson, global head of foreign-exchange research at Standard Chartered Bank in Singapore, in a note today. “This should be supportive for high-yielding currencies such as the Australian dollar in the near term.”

Asian stocks jumped, with the regional benchmark index headed for its fourth weekly advance, following a rally yesterday in U.S. stocks that pushed the Dow Jones Industrial Average above 8,000 for the first time since Feb. 10.

Further Steps

Japan’s currency fell for a second day versus the greenback on expectations Fed Vice Chairman Donald Kohn may add to measures to revive the world’s second-largest economy, reducing demand for the currency as a shelter from the global crisis. Kohn speaks at 9:10 a.m. in Ohio.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock price changes that’s used as a measure of risk aversion, fell 0.6 percent yesterday, the third day of declines.

The euro gained against the yen as European policy makers cut the target lending rate by a quarter-percentage point to 1.25 percent, compared with a half-point reduction expected in a Bloomberg survey. Benchmark rates are 0.1 percent in Japan, 0.5 percent in the U.K. and between zero and 0.25 percent in the U.S.

“Interest-rate differentials between the euro zone and other nations such as the U.S. are still favorable for the euro,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “This makes it easy to buy the euro,” which may rise to $1.3550 and 135.00 yen today, he said.

‘Increasingly Benefit’

ECB President Jean-Claude Trichet indicated at a press conference in Frankfurt following the decision that the economy should “increasingly benefit” from the measures the central bank has taken.

Executive Board Member Lorenzo Bini Smaghi last month said European interest rates are lower than those in the U.S. when making a comparison of real inter-bank lending, adding to the argument against further reductions in the benchmark. He speaks at 11 a.m. in Rome.

Declines in the yen may be limited before a U.S. Labor Department report shows the world’s biggest economy lost more than half a million jobs for a fifth month, reducing the appeal of the greenback.

“There’s a risk of position adjustments before the U.S. labor report, which may prompt buying back of the yen,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader.

U.S. Unemployment

U.S. employers probably eliminated 660,000 jobs last month, following a reduction of 651,000 in February, according to the median forecast of 80 economists surveyed by Bloomberg. The Labor Department is scheduled to release the report at 8:30 a.m. in Washington.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, decreased 0.1 percent to 84.368, and is poised for a 1 percent weekly decline."

a rebound in Asian equities will increase investor demand to purchase higher-yielding assets.

TO BE NOTED: From Bloomberg:

"Yen Falls as Stock Rally Spurs Demand for High-Yielding Assets

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By Theresa Barraclough and Ron Harui

March 31 (Bloomberg) -- The yen fell for the first time in three days on speculation a rebound in Asian equities will increase investor demand to purchase higher-yielding assets.

Japan’s currency dropped versus the dollar and the euro as the Nikkei 225 Stock Average rose 1 percent after declining as much as 0.4 percent. The euro may weaken for a fourth day against the greenback after the World Bank forecast Russia’s economy will probably shrink 4.5 percent this year.

“Japanese shares have turned positive, implying some easing in risk aversion,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest publicly traded bank by assets. “This is causing selling of the yen,” which may drop to 98.32 per dollar and 130.55 per euro today, he said.

The yen weakened to 98.07 against the dollar at 10:10 a.m. in Tokyo from 97.26 in New York yesterday. It also declined to 129.76 per euro from 128.36. The dollar traded at $1.3222 per euro from $1.3199.

The MSCI Asia-Pacific excluding Japan Index rose 0.2 percent after falling as much as 0.4 percent. Futures on the Standard & Poor’s 500 Index climbed 0.7 percent."

the developments in currency markets as a result of moves by major central banks towards quantitative easing

TO BE NOTED: From the FT:

"Carry trade makes a comeback

By Peter Garnham

Published: March 27 2009 15:50 | Last updated: March 27 2009 15:50

A rebound in global equity markets appears to have prompted the return of a familiar investment theme: the carry trade.

The strategy, which involves selling lower-yielding currencies, such as the yen, to fund the purchase of higher-yielding assets elsewhere, was popular among investors ahead of the financial crisis.

The strategy rests not just on interest differentials, but also on stability in asset markets since a sharp fall in the value of an investor’s target investment can wipe out any yield advantage of funding through a low-yielding currency.

Indeed, the turmoil on financial markets saw investors scramble to unwind carry trades as asset prices plunged. This deleveraging sent the yen sharply higher.

Against the dollar, the yen has risen 8 per cent since the collapse of Lehman Brothers in mid-September last year.

It’s rise against the higher-yielding New Zealand and Australian dollars has been more acute, rising 18 per cent and over 28 per cent respectively. But analysts say the rally in global equities has paved the way for investors to return to the carry trade.

Since hitting a 13-year low on March 6, the benchmark S&P 500 index of US stocks has notched up three straight weeks of gains, helped by the aggressive fiscal and monetary policy stance of the US authorities.

Some investors believe that the equity market sell-off has run its course.

Larry Kantor, head of research at Barclays Capital, says after the rally in markets over the past few weeks, the question foremost in the minds of investors is whether it is sustainable or yet another false start.

“We believe that the latest rally will have stronger legs, and thus marks an inflection point,” he says. “We are now recommending that investors become more aggressive and take risks across a broader range of assets.”

Hans Redeker, at BNP Paribas, says the performance of equities are important for carry trade investors.

First, reduced asset volatility allows investors to increase the size of positioning which is important for the asset side of carry trades. Second, rising asset prices will reduce deleveraging pressure.

“Deleveraging pushed the yen lower in the autumn and winter, but those days are gone,” said Mr Redeker. “Financial markets look brighter.”

Indeed, the New Zealand dollar and the Australian dollar, the two major target currencies for carry trade investors ahead of the financial crisis have performed strongly so far this month.

Buoyed also by a rally in commodity prices, the New Zealand dollar is up 14 per cent against the yen and 14 per cent stronger against the dollar since the start of the month, while the Australian dollar has climbed 8 per cent against the yen and gained 8.4 per cent against the dollar.

Mr Redeker believes there could be more gains in store, especially for the New Zealand dollar, the favourite currency of Japanese margin traders.

Rising Japanese shares are likely to increase the risk appetite of Japanese retail investors, encouraging them to send funds abroad in search of yield. “Japanese margin accounts are heavily long on the yen and when this position is reversed the New Zealand dollar will benefit most,“ says Mr Redeker.

Steve Barrow, at Standard Bank, prefers to see the developments in currency markets as a result of moves by major central banks towards quantitative easing.

He says one thing noticeable from currency movements is that the “periphery” currencies, such as the Australian dollar, New Zealand dollar, Norwegian krone and Swedish krona, have out-performed the core – or G7 – currencies.

Indeed, since the start of the month, the Norwegian krone is up 9 per against the dollar and the Swedish krona has gained 13 per cent.

All four of those countries, unlike other major economies are expected to avoid debasing their currencies by moving towards quantitative easing.

“We could, of course, throw in emerging market currencies as well although we feel they are a little more dependent on a persistence of recent stock market strength, which leaves us a little uncomfortable,” says Mr Barrow.

He says if currency investors can ride through any temporary stock market setbacks, the best returns are to be had in these periphery countries unless, they too, take the quantitative easing bait."

“The dollar is a sell near-term versus those currencies where quantitative easing is off the table,”

TO BE NOTED: From Bloomberg:

"Yen Weakens on Bets U.S. Bank Plan to Spur Higher-Yield Demand

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By Oliver Biggadike and Gavin Finch

March 23 (Bloomberg) -- The yen fell against all of its 16 most actively traded counterparts on speculation additional U.S. government steps to help banks dispose of toxic assets will reduce demand for the Japanese currency’s safety.

The New Zealand and Australian dollars extended gains versus the dollar to 10 days as global stocks rallied on U.S. Treasury Secretary Timothy Geithner’s plan to remove toxic assets from the books of banks, increasing demand for higher yields. The dollar rose against the currencies of six major U.S. trading partners on bets last week’s biggest drop since 1985 was too big to sustain.

“It looks like it’s a story that speaks more to a recovery in risk appetite,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “It plays more to the strengths of the Aussie and the kiwi.”

The yen depreciated 1.1 percent to 131.70 per euro at 11:08 a.m. in New York, from 130.29 on March 20. It touched 132.26, the weakest level since Oct. 21. The yen declined 1.2 percent to 97.11 per dollar from 95.94. The dollar gained 0.1 percent to $1.3562 per euro from $1.3582. The U.S. currency reached $1.3738 on March 19, the weakest level since Jan. 9.

South Korea’s won climbed 1.4 percent to 1,392.22 against the dollar and 2.7 percent to 14.3329 versus the yen as Goldman Sachs Group Inc. raised its outlook for the nation’s current- account surplus in the first half of 2009 to $11 billion from $7 billion and said it expected the won to appreciate to 1,300 versus the dollar within 12 months.

Yen’s Losses

The New Zealand and Australian dollars posted the biggest gains versus the yen among the major currencies today, with the kiwi increasing 2.4 percent to 54.92 yen and the Aussie gaining 2.2 percent to 67.44 yen as the MSCI World Index climbed 1.3 percent and the Standard & Poor’s 500 Index rose 3 percent.

Geithner’s plan is aimed at financing as much as $1 trillion in purchases of devalued real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. The Public-Private Investment Program will also rely on Federal Reserve and Federal Deposit Insurance Corp. debt guarantees, the Treasury said in a statement in Washington.

“The markets are looking at Geithner’s plan favorably,” said Geoffrey Yu, a London-based strategist at UBS AG, the world’s second-largest foreign-exchange trader. “We could well see the dollar push lower as risk appetite improves a bit.”

Australia’s dollar rose 1.8 percent to 69.93 U.S. cents, and New Zealand’s dollar advanced 1.6 percent to 56.78 U.S. cents. The Federal Reserve’s target range of zero to 0.25 percent for overnight lending between banks compares 0.1 percent in Japan, 3.25 percent in Australia and 3 percent in New Zealand.

Fed’s Decision

The dollar fell 4.3 percent versus the euro last week, its biggest decline since mid-December, after the Fed unexpectedly announced on March 18 it would buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities to lower consumer borrowing costs.

The 14-day relative strength index on the euro versus the dollar, a gauge used by analysts to project trends, was at 74.4 on March 19, the highest level in three months. A level above 70 tends to signal a currency’s gain is too fast to be sustained. The dollar’s gain today lowered the index to 68.2.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, was little changed today after dropping 4.1 percent last week, the biggest decrease since September 1985, when the U.S., U.K., France, Japan and West Germany agreed at New York’s Plaza Hotel to coordinate the devaluation of the dollar against the yen and deutsche mark. The gauge fell 4.7 percent in March, paring its gain this year to 3.2 percent.

Japanese Sentiment

The yen also weakened against its other major counterparts after a government survey showed confidence among Japan’s manufacturers fell the most on record this quarter, making the currency less attractive to investors.

“Japan’s fundamentals including its economy are still deteriorating, casting doubt over the appeal of its currency,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo.

The Cabinet Office and Finance Ministry said today sentiment among large manufacturers was minus 66 points in the first quarter compared with minus 44.5 points three months earlier. A negative number means pessimists outnumber optimists. The government began compiling the report in 2004.

Demand for the euro also increased after European Central Bank President Jean-Claude Trichet said in an interview with the Wall Street Journal that zero interest rates have “drawbacks” and would not be “appropriate.”

‘Most Reluctant’

“The ECB is most reluctant” to lower its 1.5 percent target lending rate, said Yuji Saito, Tokyo-based head of the foreign-exchange group at Societe Generale SA, France’s third- largest bank.

JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. are advising investors to buy euros as traders snap up currencies of nations where central bankers are resisting calls to purchase debt securities as a way of lowering interest rates and bolstering financial systems. Such currencies are becoming scarce after the Fed joined the Bank of England, Bank of Japan and Swiss National Bank in quantitative easing.

“The dollar is a sell near-term versus those currencies where quantitative easing is off the table,” said John Normand, head of currency strategy at JPMorgan in London. “The top on euro-dollar will come when the ECB looks likely to join the quantitative-easing crowd. For now, it’s content to stay on the sidelines.”

“Our strategy for 2009 is to gradually increase risk"

Some good news from Bloomberg:

"Dollar Rally Fizzling as Fed Triggers Risk Appetite (Update3)
By Bo Nielsen and Ye Xie

Jan. 5 (Bloomberg) -- The dollar, yen and Swiss franc may weaken this year against 2008’s biggest losers in the currency markets as the global economy starts to recover, the largest foreign-exchange strategists and investors say.

The winners will be the Brazilian real, Indonesian rupiah and Polish zloty as investors return to higher-yielding assets, according to Bloomberg News surveys. The dollar may strengthen versus the euro and Japanese yen, while dropping against the British pound.

“Our strategy for 2009 is to gradually increase risk( GOOD ),” said Maxime Tessier, head of foreign exchange in Montreal at Caisse de Depost et Placement du Quebec, which is Canada’s largest pension-fund manager, with C$155 billion ($130 billion) in assets. “A year from now, I definitely want to be on the short side on the dollar. We’ll see capital flows out of the U.S. again( WE'LL BE PAYING TOO LITTLE INTEREST, AND THE FLIGHT TO SAFETY WILL HAVE ABATED. ).”

While the International Monetary Fund cut its 2009 growth forecast for the world economy to 2.2 percent in November from 3.9 percent, investors are growing more confident( TRUE ) as central banks lower interest rates and governments earmark trillions of dollars for fiscal stimulus( AS THE GOVERNMENT INTERVENES. GOT THAT. ). The Dollar Index that tracks the currency against six of the U.S.’s biggest trading partners fell 6 percent last month, the most since July 1985, after rising 18 percent from June to the end of November.

The dollar lost steam as the Federal Reserve cut its target rate for overnight loans between banks to as low as zero and poured $8.5 trillion into the financial system. Treasury yields fell to records last year and rates on bills dropped below zero( ZIRP ) last month for the first time as investors sought the safety( EXPLICIT GUARANTEES ) of government debt.

Survey Results

Faster economic growth will cause the dollar to weaken to 2.30 against the real from 2.3145 at the end of 2008, according to the strategist surveys. The rupiah may follow, gaining 11 percent against the dollar to 9,850 by the end of 2010, while Poland’s zloty strengthens 13 percent to 2.62 in two years, the surveys show.

The pound may strengthen 3.5 percent to $1.51 this year, while the euro will depreciate 8.4 percent to $1.28, the strategists said. The yen, last year’s best-performing major currency, will lose 10 percent to 100 yen, they said.

Lawrence Goodman, head of emerging market currency strategy at Bank of America Corp. in New York, said countries that prove better at withstanding the global slowdown should benefit as the flight to safety slows( YES ). The dollar will decline 18 percent against the real and 19.5 percent versus the zloty, he said.

Dollar Bear

“The U.S. dollar will get weaker versus emerging-market currencies,” said Mark Mobius, who oversees about $26 billion in developing-nation assets as executive chairman of Templeton Asset Management Ltd. in Singapore, in a Dec. 24 Bloomberg Television interview. “The reason why we had this weakness in emerging-market currencies is because of the rush into the U.S. Treasuries, into dollars. I don’t think that’s sustainable( I AGREE ).”

Investors see little need to hold dollar assets( THIS IS BUITER'S WORRY ) as the Fed floods the world with greenbacks, the U.S. budget deficit swells to more than $1 trillion and with the trade gap exceeding $57 billion. China cut the share of dollars in its $1.9 trillion of reserves to about 45 percent last year from more than 70 percent in 2003, Deutsche Bank AG in Frankfurt estimates.

U.S. efforts to fix the financial system and the stimulus package promised by President-elect Barack Obama may still support the dollar by helping the world’s biggest economy recover faster than Europe and Japan.( TRUE )

Japan Outlook

Japan’s economy will probably shrink( AN EXPORT COUNTRY ) at an annual 12.1 percent pace this quarter, the sharpest drop since 1974, after reports showed industrial production and exports posted the biggest declines on record in November, Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo, said last week.

By the end of 2009, the U.S. economy will be growing at a 1.8 percent annual pace, while the euro zone will be shrinking at a 0.4 percent rate and Japan will be expanding 0.4 percent, according to Bloomberg surveys.

Deutsche Bank, the world’s biggest currency trader, is among the most bullish on the dollar( IN THE SHORT RUN ), forecasting a rally to $1.20 versus the euro, and to $1.30 against the pound, as the European Central Bank cuts its target rate to 0.75 percent this year from 2.5 percent, and the Bank of England lowers its benchmark to 0.5 percent from 2 percent.

Bank of England policy makers meet Jan. 8 and are likely to lower their target rate to 1.5 percent, according to the median estimate of 50 economists surveyed by Bloomberg. The ECB meets Jan. 15 to set borrowing costs.

U.S. Outlook

The U.S. economy will grow 1.6 percent in 2010 after contracting 2 percent this year, while the 16-member euro zone shrinks 2.5 percent in 2009 and expands 1 percent the next, according to Deutsche Bank. Treasuries due in 10 years will yield 50 basis points, or 0.5 percentage point, more than comparable German bunds by year-end, instead of about 75 basis points less currently, the bank predicts.

“Like after the Great Depression, the recession in the 1970s and the end of the Cold War, the U.S. will emerge strengthened from this crisis and our competitors won’t,” said Marc Chandler, head of currency strategy at New York-based Brown Brothers Harriman & Co. “Our policies have been very aggressive while the rest of the world has been dragging its feet.”

By year-end, the dollar will trade at $1.30 against the euro and at 100 yen, Chandler said. He predicts it will trade at $1.42 per pound.

The dollar rose to 92.96 yen at 9:16 a.m. in New York, from 91.83 yen on Jan. 2, after earlier reaching 93.57 yen, the highest level since Dec. 8. Against the euro, the dollar climbed 2.3 percent to $1.3611 from $1.3921.

Losing Bet

Selling the dollar in 2008 was a losing bet, as the Dollar Index gained 6 percent to 81.308, its first annual increase since rising 13 percent in 2005. The yen and franc also benefited from investors getting out of risky assets, with Japan’s currency appreciating 19 percent and Switzerland’s strengthening 5.7 percent versus the dollar.

The greenback’s share of foreign reserves rose in the third quarter to 64.6 percent from 63 percent at the end of June, the Washington-based IMF said Dec. 31, the biggest increase since the first three months of 2004.

Investors bought the dollar to purchase Treasuries and shield their money from credit-related losses and stock declines( EXPLICIT GUARANTEES IN A CALLING RUN ) that wiped out more than $28 trillion from equity markets. Writedowns and losses at the world’s largest financial institutions since the start of 2007 total $1 trillion, according to data compiled by Bloomberg.

‘Turning the Economy’

The biggest beneficiary was the yen, as the retreat from risk caused investors to unwind carry trades and buy back the Japanese currency that financed purchases of higher-yielding assets. The search for higher yields may trigger demand for the Australian and New Zealand dollars as money managers take advantage of central bank rates more than 4 percentage points higher than in Japan( TRUE ).

The Australian dollar, which weakened 20 percent against the U.S. dollar last year, depreciated 35 percent in 2008 to 63.67 yen. New Zealand’s dollar fell 39 percent to 52.53 yen.

Emerging markets were among the biggest losers last year as the MSCI EM Index fell 54.5 percent.

“If the governments are successful turning the economy, ironically, that will come along with a very weaker dollar,” said Chirag Gandhi, a money manager of a $2.5 billion global fixed-income fund at the Investment Board of State of Wisconsin in Madison, Wisconsin.

‘Signs of Bottoming’

Developing economies will grow 3.1 percent in 2009, following a 5.9 percent gain last year, while developed countries, including the U.S., the euro area and Japan, will contract 1.4 percent after expanding 0.9 percent in 2008, the Institute of International Finance said in its forecast released Dec. 18 in Washington. The group represents the world’s largest commercial and investment banks.

The currencies of Poland, Brazil and Indonesia will be among the best performers, Bank of America’s Goodman said. The zloty will strengthen to 2.39 per dollar by the end of June after dropping 21 percent. The real will surge to 1.90 after plummeting 30 percent and the rupiah will trade at 10,000 by the end of September, Goodman wrote.

Emerging-market bonds are starting to draw investors( GOOD NEWS ). The extra yield they demand to own the debt instead of Treasuries fell to 6.94 percentage points from 8.62 percentage points in October, according to JPMorgan’s EMBI+ Index.

“If we see some signs of bottoming, then the extreme risk aversion will start to mitigate( I AGREE ),” said Robert Kowit, who manages $3 billion of global bonds at Federated Investors Inc. in Pittsburgh. “At that point, we’ll be left with a huge amount of the dollars that have been printed and a huge amount of debt to be issued and bought.”( VERY TRUE )

We are seeing signs of a diminution in the fear and aversion to risk. How fast will this diminution occur?

"Yields on 10 year Japanese government bonds are now around 1.20%… you see the reversal of the yen carry trade happening… yes …"

Shopyield with an important post:

The view from Nihonbashi…

Imagine that you are sitting in your office at the Bank of Japan building in Nihonbashi, Tokyo … you’re clicking through the news stories on your Bloomberg terminal and you come across the following about American consumers:

~~~~ ” ….Retailers, which started offering discounts of 50 percent or more weeks ago, had been counting on post - Christmas sales to help rescue what will probably be the worst holiday season in four decades. That’s not going to happen, said Burt Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York.

“This week isn’t going to do it,” Flickinger said in a Bloomberg Television interview. “Consumers are more cash- and credit-constrained than ever before. After a 25-year spending tsunami, they’ve shifted from spending to savings.” ~~~~

Uhmmm… you think… American consumers are shifting to savings … this will have implications for Japanese and US monetary policy… significant ramifications… you consider the actions of your central banking counterparts at the Federal Reserve who have begun engaging in “quantitative easing (QE)” like the Bank of Japan did between 2001 and 2005…

~~~~ ” … The Bank of Japan is the only major central bank in modern times to rely on quantitative easing — the strategy of injecting more reserves into the banking system than needed to keep the target interest rate at zero.

Steps Bernanke has taken so far have prompted some Fed officials and economists to say the central bank is already pursuing such a policy. With an array of emergency-loan programs aimed at easing the worst credit crisis in seven decades, Bernanke has expanded the Fed’s balance sheet to $2.11 trillion as of last week, more than double the year-earlier level…

… Bank of Japan Governor Masaaki Shirakawa said in May that while the strategy “was very effective in stabilizing financial markets,” it had “limited impact” in remedying Japan’s economic stagnation because banks wouldn’t lend and companies wouldn’t borrow…. ” ~~~~

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A nice primer on Quantitative Easing

Quantitative easing from Marketplace on Vimeo.

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Now many beyond the precincts of Nihonbashi, Threadneedle and Liberty Streets have broader visions for the role of the central banks in restarting the various frozen economies … from the FT.com Economists Forum blog via Libertarian Democrat Point of View …

This passage describes the Federal Reserve purchasing US Treasuries to push down Treasury yields in an effort to force banks to lend instead of buying Treasuries to capture the yield spread …

The authors are arguing that the Federal Reserve extend this practice beyond the debt of the national government to the debt of private corporations… this would represent a massive intrusion into the economy on the part of the Federal Reserve… the authors argue…

~~~~ ” … Quantitative easing will be much more effective if the central bank uses its balance sheet to buy not government bonds but better quality illiquid and undervalued structured and mortgage-backed securities. This eases bank funding constraints and so directly expands the stock of credit.

Moreover, as the economy recovers, credit spreads will fall and so the central bank can make a profit.

Quantitative easing will be more powerful still if the central bank takes pure credit spread exposures, using interest rate swaps to remove its exposure to fluctuations in nominal interest rates.

It can also conduct equivalent synthetic transactions, purchasing government bonds alongside an interest rate swap and the acquisition of negative net worth credit default swaps. Unlike a private sector participant, as the monopoly supplier of outside money it can always meet margin calls and so cannot be squeezed out of credit default swap trades.

Finally, to guide expectations, it should set forward targets for credit spreads.

Perhaps the clearest way to present this point is to put the question in another way: what is the most appropriate alternative instrument of monetary policy, during the period when money market interest rates are reduced to their zero floor?

Aggregate bank reserves or money stock are poor choices, since in present circumstances they can increase by huge amounts without impacting credit or expenditure. A better choice is market credit spreads. The Bank of England’s monetary policy committee can use its regular meetings to announce its preferred levels for average market credit spreads. Bank monetary operations can enforce this decision.

By setting credit spreads at appropriate levels the bank will put a floor under market values, restore credit market liquidity and economic activity and make a handsome profit to boot.” ~~~~

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Back to Nihonbashi… after pouring your second cup of tea for the morning you pull out the most recent Bank of International Settlements quarterly report… you are trying to remember the relative scale of open market operations during the credit market panic of 2008… the Federal Reserve, the European Central Bank and the Bank of England have all conducted operations and lent in significant volume… see below…

This means that central banks have inserted “significant liquidity” into the global financial system… “significant liquidity” … ( VERY TRUE )

Sipping your tea you wonder … how much of this “significant liquidity” will be funnelled into a carry trade? ( GOOD QUESTION )

The carry trade definition…

~~~~ ” A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage the investor chooses to use.” ~~~~

Yields on 10 year Japanese government bonds are now around 1.20%… you see the reversal of the yen carry trade happening… yes … making monetary policy with the new activities of Federal Reserve Chairman Bernanke will be complex… all the old patterns are breaking down…

~~~~ ” … By early year 2007, it was estimated that some US$1 trillion may be staked on the yen carry trade. Since the late-1980’s, the Bank of Japan has set Japanese interest rates at very low levels making it profitable to borrow Japanese yen to fund activities in other currencies. Many of these activities included matters like subprime lending in the USA, yet also include funding of emerging markets especially BRIC countries and resource rich countries.

According to Gary Dorsch of Global Money Trends, the yen carry is a “weapon of mass destruction” of $5.9 trillion, with yen loans another 1.2 trillion dollars on top of it, making Arabian oil wealth or Chinese reserves look small at $1.5 trillion and $1.9 trillion respectively.” ~~~~

BIS Charts via the Capital Spectator"

As I've said, I don't think that Japan can change from an export driven, high savings, and low interest country.

No matter how one wishes to describe it, the US will have to default on its sovereign debt, most likely on a selective basis

Here's a proposal that I thought China, Germany, or Japan (For Export Reasons ) might make, because the Saver Countries love the current arrangement and don't want to change. From Bloomberg:

"By Stanley White and Shigeki Nozawa

Dec. 24 (Bloomberg) -- Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.( TRUE )

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.( TRUE )

“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.”( TRUE )

The U.S. budget deficit may swell to at least $1 trillion this fiscal year as policy makers flood the country with $8.5 trillion through 23 different programs to combat the worst recession since the Great Depression. Japan is the world’s second-biggest foreign holder of Treasuries after China.

The U.S. government needs to spend on infrastructure to maintain job creation as it will take a long time for banks to recover from $1 trillion in credit-market losses worldwide, Mikuni said. The U.S. also needs to launch public works projects as the Federal Reserve’s interest rate cut to a range of zero to 0.25 percent on Dec. 16. won’t stimulate consumer spending because households are paying down debt, he said.( POSSIBLE )

U.S. President-elect Barack Obama wants to create 3 million jobs over the next two years, more than the 2.5 million jobs originally planned, an aide said on Dec. 20. Obama takes office on Jan. 20.

Marshall Plan

Japan should also invest in U.S. roads and bridges to support personal spending and secure demand for its goods as a global recession crimps trade, Mikuni said.

Japan’s exports fell 26.7 percent in November from a year earlier, the Finance Ministry said on Dec. 22. That was the biggest decline on record as shipments of cars and electronics collapsed.

Combining debt waivers with infrastructure spending would be similar to the Marshall Plan that helped Europe rebuild after the destruction of World War II, Mikuni said.

“U.S. households simply won’t have the same access to credit that they’ve enjoyed in the past,” he said. “Their demand for all products, including imports, will suffer unless something is done.”( TRUE )

The plan was named after George Marshall, the U.S. secretary of state at the time, and provided more than $13 billion in grants and loans to European countries to support their import of U.S. goods and the rebuilding of their industries

Currency Reserves

The Japanese government could use a new Marshall Plan as a chance to shrink its $976.9 billion in foreign-exchange reserves, the world’s second-largest after China’s, and help reduce global economic imbalances, Mikuni said.

The amount of foreign assets held by the Japanese government and the private sector total around $7 trillion, Mikuni said.

Japan will also have to accept that a stronger yen is good for the country in order to reduce excessive trade surpluses and deficits, he said. The yen has appreciated 23 percent versus the dollar this year, the most since 1987, as the credit crisis prompted investors to flee riskier assets and repay loans in the Japanese currency.( FLIGHT TO SAFETY )

“Japan’s economic model has been dependent on external demand since the Meiji Period” that began in 1868, Mikuni said. “The model where the U.S. relies on overseas borrowing to fuel its property market is over. A strong yen will spur Japanese domestic spending and reduce import prices, thereby increasing purchasing power.”

I thought that China would offer this first, but Japan's drop in exports is obviously panicking them. I'll repeat my point: It will not be easy for the Saver Nations to change, so that they will try and come up with creative plans to keep this system going. This is an example.

Now, I had actually missed this Bloomberg story, which I believe is important, but Jesse's Cafe Americain picked it up. So here's Jesse's take:

"Japanese Economist Urges Selective Default on US Treasury Debt

Here is an interesting proposal for a 'selective default' of US Treasury debt to head off a massive devaluation of the dollar, and to promote the US recovery from the ravages of its self-inflicted financial damage.

No matter how one wishes to describe it, the US will have to default on its sovereign debt, most likely on a selective basis, writing down the rest through an inflated dollar. The Japanese recognize this and are volunteering a tentative plan to accomplish it to support their industrial policy.

Although there is a potential for a voluntary debt forgiveness from Japan as a loyal client state, we wonder if the rest of the world will be inclined to support an unreformed dollar hegemony.

Can the economic world so woefully lack the will, knowledge, and the imagination to develop a more equitable mechanism for international trade?

Financial reforms, although not even on the table yet, are certain to come with any sustained recovery. There has been nothing even seriously proposed yet as Bernanke and Paulson rush to supply fresh capital to prop up the status quo and aid their cronies on Wall Street.

We can surely do better than this."

I disagree. From the point of view of the Saver Countries, this would be the easiest and cleanest solution, and would allow the symbiosis of Saver and Spender Countries to continue. If not this, they will soon be floating other similar options.

"The dollar's fall, however, is making it far harder for Europe and Japan in particular to export their way out of recession. "

I posted a graph showing the recent rise and decline of the dollar. From the Washington Post:

"By Anthony Faiola

Washington Post Staff Writer
Thursday, December 18, 2008; Page A01

The dollar yesterday staged one of its biggest one-day drops against the euro and fell to a 13-year low against the Japanese yen as near-zero interest rates and the Federal Reserve's plan to print vast sums of cash dilute the value of the greenback.( Quantitative Easing )

The drops dramatically accelerated the dollar's reversal of fortune over the past three weeks after months of solid gains( THE FLIGHT TO SAFETY IN US BONDS ). The slide underscores the risks the Federal Reserve is taking to jump-start the U.S. economy through aggressive monetary policy( THERE ARE RISKS ).

On Monday, the Fed cut its target for the federal funds rate, at which banks lend to each other, from 1 percent to a target range of 0 percent to 0.25 percent, and effectively vowed to print as much money as it needs to try to pull the United States from a worsening recession ( I'M FOR THIS ).

While that policy may ultimately aid an economic recovery, it is robbing the dollar of value as investors anticipate less interest on their dollar-denominated investments and more bills in circulation, making each one worth a bit less. In response, investors are dumping the dollar and buying up other currencies ( I PREFER TO SAY THAT IF THEY BUY BONDS NOW, AND INFLATION ARISES, THEIR BONDS WILL BE WORTH LESS. ON THE OTHER HAND, SINCE THERE WILL BE MORE DOLLARS IN CIRCULATION, THE DOLLARS THEY ARE HOLDING NOW WILL BE WORTH LESS ( FROM QUANTITATIVE EASING ) ).

If the dollar's fall is unchecked, it could jeopardize the long-term faith of foreign investors in the value of the American currency and could cause foreign investors to dump U.S. stocks and other assets, whose value would be worth less in euros or yen( TRUE ). The Dow Jones industrial average fell 1.1 percent yesterday.

A sharp rise in the value of foreign currencies could slow economic recovery in Europe and Japan because it would make their exports more expensive in the United States ( TRUE ). A steep, sustained fall in the dollar could force the Fed to abruptly raise interest rates to prop it up( IN ORDER TO GIVE INVESTORS AN INCENTIVE TO BUY BONDS BECAUSE OF THE HIGHER INTEREST RATES, AND THEIR DOLLARS WOULD GAIN IN VALUE IF THE MONEY SUPPLY CONTRACTS ). That would drive up costs( BECAUSE IT WOULD BE PAYING MORE INTEREST ) for the U.S. Treasury as it seeks to raise cash for bailouts by issuing billions of dollars worth of new debt to investors.

"The risk is that the deceleration of the dollar could cascade, and push interest rates up as the rest of the world demands a higher return on U.S. investments," said C. Fred Bergsten, director of the Peterson Institute for International Economics.

But higher interest rates could weaken demand even more. The deteriorating economic outlook helped send oil prices down yesterday to $40.06 on the New York Mercantile Exchange, despite production cuts by the Organization of the Petroleum Exporting Countries, and the falling dollar, which should help drive up oil prices because they are denominated in dollars( AND SO WORTH LESS ).

The dollar shed about 3 percent against the euro yesterday, falling to $1.44. It lost 1.3 percent against the Japanese yen, dropping to 87.93, the lowest since July 1995.

The slide marks another turn on the dollar's roller coaster year, which it began at multiyear lows when the U.S. economy slowed even as much of the rest of world was still growing. But as investors began to grasp that Europe and Japan were facing recessions as bad, if not worse, than the one in the United States, the dollar staged a rally. Between July and November, the dollar climbed about 24 percent against a basket of six major world currencies( MAINLY THE FLIGHT TO SAFETY ).

The Fed's aggressive interest rate policy ( QUANTITATIVE EASING ), coupled with a sense that the United States may face dire problems in the auto industry( MORE EASING AND DEBT ), have erased about half those gains in the past three weeks. Up until recently, emerging market currencies were also losing ground against the dollar. The Chinese, analysts say, have been massively intervening in currency markets in recent months to weaken( KEEP IT CHEAP ) the yuan and make Chinese exports more competitive overseas( BY STAYING CHEAP ). But the yuan has jumped 0.7 percent against the dollar this month, despite continued Chinese intervention.

That is good news for U.S. exporters ( OUR GOODS ARE CHEAPER ). The cheaper dollar earlier this year had boosted overseas sales of American-made products from airplanes to soybeans, making exports a rare bright spot of the economy. In recent months, however, the export boom has faded as the dollar strengthened and the global economy waned. The suddenly weaker dollar may now help put U.S. exports back on track, just when the economy needs all the help it can get ( THEORETICALLY, EXPORTS SHOULD GO UP WITH A CHEAPER DOLLAR, AND, AT SOME POINT, AS THE ECONOMY DOES BETTER, THE DOLLAR WILL STABILIZE OR TURN AROUND ).

The dollar's fall, however, is making it far harder for Europe and Japan in particular to export their way out of recession ( THEIR GOODS ARE GETTING MORE EXPENSIVE FOR US ).

Japan, which already has near-zero interest rates, has little room to lower them further to weaken the yen. But analysts say Tokyo is likely buy more dollars ( THAT SHOULD STRENGTHEN THE DOLLAR, MAKE THE YEN CHEAPER ) in an attempt to drive the yen down in value.

The dollar's fall is putting particular pressure on the European Central Bank to follow the Federal Reserve and the Bank of Japan and dramatically cut interest rates ( WITH THEIR HIGHER INTEREST RATES AND RETURN, MONEY IS GOING THERE AND NOT TO THE DOLLAR ), according to analysts. The ECB has been reluctant to slash rates too deeply, partly because it fears that inflation will reemerge in major countries like France( THIS SHOULD BE EXPLAINED ) should rates fall too low.

Yet analysts say the weakened dollar may force the ECB to cut rates, fearing the steep climb in the euro could make it far harder for export-driven economies like Germany to stage a recovery. Some in Europe are responding aggressively. The Central Bank in Norway, which does not use the euro, dramatically slashed key interest rates yesterday by 1.75 percent to 3 percent.

"This really puts the Europeans in a corner," said Simon Johnson, former chief economist at the International Monetary Fund and an economist at the Massachusetts Institute of Technology. "They can't just sit there and watch the euro climb( EXPORTS WILL GO DOWN, HURTING THEIR ECONOMY )."

Other analysts argue that the dollar may surge again in the weeks ahead, particularly if the Fed's aggressive moves begin to show signs of lifting the U.S. economy ( IF QUANTITATIVE EASING WORKS ).

"I'm a little skeptical that this is the end of the dollar's rebound," said John Shin, currency strategist at Merrill Lynch in New York. "Investors are reacting to the anticipation and the actuality of the Fed's plan to flood the world with dollars. But the U.S. is not alone in its problems, and you're seeing particular stress on the European economy. You have to think that the Fed is ahead of the curve, and by the time the Europeans get there, the U.S. economy may be better positioned for recovery( OTHER COUNTRIES WILL END UP DOING WHAT WE'RE DOING, GIVING THEM NO COMPETITIVE ADVANTAGE WITH HIGHER INTEREST RATES, GIVING THE DOLLAR STRENGTH AGAINST THE OTHER CURRENCIES )."

The Dollar's steep rise was the Flight To Safety, the steep decline is Fear Of Inflation. Both are likely overreactions to actual conditions. I hope.

"seizing the world financial crisis as the greatest buying opportunity in a generation. "

A interesting post on the NY Times:

"Since last month, Japan’s legions of household savers have poured into the market by the tens of thousands — many of them first-time investors — seizing the world financial crisis as the greatest buying opportunity in a generation.

Sitting atop $15 trillion in personal savings, they are snapping up equities, currencies and even riskier investments like index futures, to some extent replacing foreign investors and even helping drive a limited rally in Tokyo’s beleaguered exchanges, say stock analysts.

“The stock market rout has popularized stock trading like nothing before,” said Yuji Kusunoki, president of Rakuten Securities. “It’s a paradox, but all the grim news has actually ended up making the market seem more attractive.”

This makes sense to me. And:

“I’m usually quite conservative,” Ms. Fujiwara said. “But prices were just so cheap, it looked better than leaving my money in the bank.” She says she has broken even since she started investing in early October."

Sounds good. And:

"The change has helped end a large outflow of yen overseas known as the yen-carry trade. For years, Japanese households poured money into overseas assets, where they could earn better returns than in Japan with its near-zero interest rates. But in October, net investment in domestic stock mutual funds surpassed investment in foreign bond funds for the first time in 27 months, according to Nomura Research Institute, a Tokyo-based consulting company. "

So they are investing in Japan now, keeping the money in the country.

"Stock analysts said the risks of buying in the teeth of a global recession were huge, and trying to call the bottom as stocks appear likely to face further declines is potentially costly. But they said the long time frame of most small investors, who tend to buy and hold shares for years, meant they may come out ahead eventually.

“They are wading into a treacherous market,” said Katsuyasu Murata, deputy general manager of sales planning at Daiwa Securities, “but prices have fallen to the point that they make no sense.”

I would say the bull market that we had was a treacherous market, but that's just me.

“Japanese individuals are natural contrarians,” said Tsuyoshi Ogata, a spokesman for SBI Securities, a Tokyo-based online brokerage firm. “They only come in on the big dips” that come every half decade or so, he said."

Again, makes sense to me.

“Regular office workers have no chance to get rich, and it’s hard to imagine Japan become much wealthier, either,” Mr. Mukai said. “I’m doing this to take care of myself, by myself.”

I like his attitude.

"To add insult to injury the US government is now paying 2-3 percentage points less on its short term debt "

Weren't we advised not to compete against each other in this crisis. From Vox, Daniel Gros and Stefano Micossi:

"The plunging euro

Why is the euro plunging against the dollar and the yen? Why are European banks coming under renewed pressure? Should the emerging financial and foreign exchange crisis of countries gravitating around the euro lead to new EU policy instruments?

The euro is plunging against the dollar because investors, in their scramble for safety and liquidity, are flocking to US and, also to some extent, Japanese government bonds which are considered safer and more liquid than other government-backed paper available in the market – including public debt instruments issued by European governments. In other words, the constellation of separate markets for sovereign debt paper of unequal quality issued by European governments cannot compete with the US market for the huge global financial flows in search of a safe harbour. Until the EU develops a unified market for bonds denominated in euro and backed jointly by EU member states – or, better, by euro-area member states – its claim for the status of reserve currency for the euro will not be met. As a result, capital is not coming to Europe, where it is badly needed to shore up its shaken financial system; moreover, the US will continue to dictate the agenda in international monetary affairs, even now, after the colossal damage inflicted on the world by their misguided macro and regulatory policies. To add insult to injury the US government is now paying 2-3 percentage points less on its short term debt than even the most virtuous EU member states."

Situation:

1) In this crisis, investors are investing in the U.S. and Japan

Problem:

1) Not Europe

2) America caused crisis, and we're getting screwed

Solution:

1) European bonds in euros backed jointly

"The overall message from financial markets is that investors everywhere have developed a strong preference for public debt. In the US and Japan, public debt carries no risk because if needed the government could always force the (national) central bank to print the money needed to meet its obligations. But this is not the case in Europe since no European government can force the ECB to print money. For international investors there is thus no euro area government bond in which they could invest to diversify their risk away from the dollar.

We thus have at the same time strong demand for ‘European’ bonds and a need for massive government capital infusions to prevent the crisis from getting worse in the banking sector and the European periphery. This is why the EU should set up a massive European Financial Stability Fund (EFSF). The fund will probably have to be at least on the scale of the US Troubled Assets Relief Programme (TARP), say €500–700 billion. It would issue bonds on the international market with the explicit guarantee of member states. As the rationale for the EFSF is crisis management, its operations should be wound down after a pre-determined period (5 years?). For global investors EFSF bonds would be practically riskless having the backing of all member states."

Situation

1) Investors love public debt in countries with central banks that can print money

Problem

1) Europe doesn't

Solution

1) European bonds backed by national banks jointly ( By the way, I love the phrase "practically riskless)

"The resources available to the EFSF would be used mainly for bank recapitalisation, especially for those banks which rather ‘gamble for resurrection’ than accept the presence of heavy handed interference of national governments. Moreover, the EFSF could also beef up the funding of existing EU instruments for balance of payments assistance to the European neighbourhood. But a key consideration in setting up such an emergency fund should not be the problems that are already known. Given the unpredictable nature of this crisis, a key consideration should be for the EU to prepare for the ‘unknown unknowns’ that are certain to arrive sooner rather than later."

Did they really say 'unknown unknowns'?

Anyway:

1) Let's give the money to banks trying to remain private ( with government money)
2) They like TARP

Good luck.

"The important thing to know about Mrs Watanabe is that, temporarily at least, she has all but stopped flapping her wings"

Who is Mrs. Watanabe?

"Mrs Watanabe is crude shorthand for Japan’s $15,000bn pool of savings, the deepest in the world and worth more than the annual economic output of the US. These vast resources are somewhat apocryphally marshalled by Japanese women, who have traditionally held a firm grip on family finances."

Let's see:

1) Rising yen
2) Lower interest rates
3) Next bubble

David Pilling in the FT:

"The yen carry trade has not been the only cheap source of liquidity in recent years. But Ashraf Laidi, chief currency strategist at CMC Markets, reckons it has been the biggest. He quotes figures suggesting that Japanese households alone, discounting savings mediated through life assurers and other institutions, have mobilised $500bn in outbound funds. That leaves aside speculators, who have borrowed unknowable amounts of yen to invest abroad, often on highly leveraged terms.

Just as state bank bail-outs risk moral hazard, more recklessness and the need for future bail-outs, so the unwinding of the carry trade carries with it the danger of the next great bubble. In Japan, the central bank appears to have reacted to a rising yen and sinking stock market by contemplating the uncontemplatable: a rate cut. Even the rumour of such has provoked a mini equity rally and a weakening of the currency.

This is poison for the BoJ. It hated having to keep rates low, fearing that cheap money can cause bubbles in real estate, in capital investment and in the carry trade. Its sightings of inflationary danger everywhere provoked mirth among outside experts. But few are laughing now."

And so:

"If Japan really is about to reverse course towards zero interest rates, it will once again become the source of almost free money for anyone with an appetite to invest. Worse even than that, says Mr Laidi, is the potential for an even more dangerous dollar carry trade. The Federal Reserve has been desperately cutting rates, and lopped another half point off again on Wednesday. The nearer US interest rates approach zero, the greater the incentive to move dollars into higher-yielding assets elsewhere.

These gyrations do nothing to solve the underlying problem, which is that Asia has an excess of savers and the US and Europe an excess of spenders. Unless that is solved, the world seems condemned to repeat the swings of recent years, as capital is arbitraged between countries where money is cheap to those where it is expensive."

Problems:

1) Dollar carry trade

2) Asia saves, the West spends

3) Here we go again

Is this real?

"and being taken aback by the amount of buying on margin in which ordinary Japanese investors were indulging."

Japanese investors also invested in the carry trade, and the rise of the yen has caused them some problems. John Gapper in the FT:

The abrupt rise of the yen and the dollar against higher-yielding currencies seems to have been driven by hedge funds unwinding various forms of carry trade - borrowing in a low-yielding currency and investing in assets in higher-yield economies. This has caused havoc in financial markets in the past couple of weeks...

Hedge funds that invested heavily the carry trade, using leverage, are obviously in trouble to judge by the rapid changes in exchange rates...

The accounts showed that it was common for Japanese retail investors to be offered leverage of 20 times or more for their cash. In other words, they could deposit the equivalent of $1,000 and take trading positions of $20,000. A lot of them had used the opportunity to buy higher-yielding foreign assets.

The trade worked fine for Japanese investors as long as currencies remained stable and they could in effect switch yen into higher-yielding assets denominated in other currencies. But the sharp rise in the yen - and comparative fall in the value of these foreign assets - is probably landing Mrs Watanabe and her friends with big losses.

Here, to expand the point, is a prescient piece from FT Alphaville a year ago."

Pretty straightforward.