End of the Yen -- coming soon??

Clipped from "The Yen’s Looming Day of Reckoning" By Andy Xie, Caxen, 03.23.2012 and seen on TBP.

Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan’s major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan’s neighbors and its distant competitors like Germany. The yen’s devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japan’s neighbors must have a strong banking system to withstand a bigger devaluation of the yen.

Japan’s nominal GDP contracted 8 percent in the four years to the third quarter of 2011, and six percentage points of that was due to deflation. Without increased government expenditure, the contraction will be one percentage point more. Japan has not seen this kind of sustained deflation since the 1930s.

A strong yen, deflation and rising government debt form a short-term equilibrium that lasts as long as the market believes it is sustainable. The yen has seen a relentless upward trend since it depegged from the dollar in 1971, up to 83.4 from 360 again to the dollar. Japan’s nominal GDP peaked in 1997 and its nominal wages did too.

As Japanese institutions and households hold almost all of the government’s debts, their faith in the government’s creditworthiness is the mojo for Japan’s seemingly harmless deflationary spiral.

Japanese culture is group-oriented. This psyche was the reason that Japan’s property bubble became so big in the 1980s, five to six times the size of the bubble in the United States. After the property bubble, the group psyche shifted its power to a strong yen, pushing Japan’s economy onto the path of a rising yen, deflation and rising government debt.

A yen collapse will impact China and South Korea most, just like in 1998.