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Wednesday, February 25, 2009

Shorting the Yen: Japan's Exports Collapsing

The incredible strength in the Japanese Yen (XJY) has been fueled by two massive forces; the ridiculously huge Yen Carry Trade unwind that was the result of the an uber leveraged global financial system and the safe haven bid. Perversely it was the reliability of the strength of the Yen as the carry trade was unwound that made the Yen an appealing save haven... fueling further strength.

The result of course has been the absolute destruction of the export dependent Japanese economy.

Consequently, the Yen will go cliff diving. The tricky part of course is the timing...

The Yen has come off quite a bit against the major currency pairs. Building a short position on strength with a longer term time frame would probably present the best risk reward profile.

Japan Exports Plummet 45.7%, Deficit Widens to Record (Update2): "Japan’s exports plunged 45.7 percent in January from a year earlier, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics.

The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The drop in shipments abroad eclipsed a record 35 percent decline set the previous month.

Exports to the U.S. tumbled an unprecedented 52.9 percent from a year earlier, and shipments to Asia and Europe also posted the largest-ever declines as the global recession deepened. The collapse is likely to force Japanese companies to keep firing workers and closing factories, worsening an economy that shrank the most in 34 years last quarter.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo.

Shipments to Europe slid 47.4 percent in January from a year earlier, the Finance Ministry said. Exports to China fell 45.1 percent and those to Asia dropped 46.7 percent.

The yen traded at 96.49 per dollar as of 10:49 a.m. in Tokyo from 96.72 before the report. The currency is near the lowest level against the dollar in three months as the weakening economy reduces its allure as a haven.

The yen’s 23 percent gain against the dollar in 2008 eroded the value of exporters’ overseas sales, exacerbating losses at companies including Nissan Motor Corp. and Toyota Motor Corp. This year, the currency has weakened 6.3 percent, offering some relief to exporters while indicating investors’ growing pessimism about Japan’s economic outlook."

See Japan's "Unimaginable" Contraction for more details.


Evan said...

Found this on DG's daily letter...

Soaking the rich would not only be profoundly immoral, it
would drastically penalize the very virtues… thrift;
business foresight; and investment… that have brought
about our remarkable standard of living in the United
States. It would truly be killing the goose that lays the
golden egg.
Murray Rothbard.

CodeMonkey said...

On a completely unrelated note... so much for the rally.

I smell a crash in the air...

Dave Narby said...

Crash in the Yen should lift US equities... So I vote for more volatility and a bounce before the crash.

Who can freakin' tell though... It's impossible to know what anything is actually worth when govt's are screwing with everything they can screw with.

CodeMonkey said...

I meant a U.S. equities crash

Anonymous said...

Exports plunged 45.7%, HOLY F-ING SHEET that is unbelievable. Atlas has Shrugged.

Tord Steiro said...

Was Peter Schiff partly right after all?

Isn't this decoupling? Trade flows unwind, curency volatility, and general economic hardship. Yes, I know Peter Schiff could be iterpreted as if he believed that the crisis would be a US phenomenon, and that the other economies of the world would go largely unscathed out of it - that is obviously wrong, however, while countries like Japan and China still have their production base more or less intact, the US and significant parts of Europe have seen their productive bases erode as borrowing has become the income of choice, rather than production.

When the resit of the world stops lending, these entities have to stop consuming, and since their productive base is eroded, the importance of the entities will diminish - decoupling.

The rest of the world, with a strong productive base, will certainly start to spend their money themselves rather than lend it to us, hence they will emerge from the crisis stronger and richer than they where, although the correction is indeed painful.

In a longer perspective, Japan's production is going to reach past levels, but the US and EU consumption is not. Sounds like decoupling to me.

Or not? I may do some crucial mistakes here, please enlighten me if I do!

Anonymous said...

Hey Tord! That's kinda insightful.

Ben Bittrolff said...

Tord Steiro,

I think you're on to something. It's definitely worth exploring in greater detail.

BTW, thanks for the high quality, thoughtful comments. Due to time contraints I can't respond to them all, but I most definitely read them all...

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