Thursday, April 15, 2010

Japan Wants to Devalue Yen by 30%: Would Trigger Currency Wars and Commodities to Soar

Bank of Japan’s governor told lawmakers “History has proven that central banks directly buying government securities caused severe inflation and dealt a blow to the economy. The BoJ is now providing adequate funds,”. Humm, what has the Fed being doing in the U.S.?

The issue is that Japan’s ruling party has called devaluation of the yen by 30% to halt the slide into deflation and this puts it on a collision course with the Bank of Japan, which is haunted by hyperinflation after World War II.

If Japan devalues its currency, it would become far more competitive abroad, at the potentially grave danger of high inflation internally.

However, what is worse is that if a country like Japan can devalue its currency, others may be tempted to follow and it would become a race to weaken the currencies. The outcome will be inflation around the world.

Commodities and necessary goods (food, oil, basic metals) will soar.

The report is by the Daily Telegraph.

"A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.
Shizuka Kamei, financial affairs minister, said the central bank must monetise government debt to support the market for state bonds and prevent deflation becoming deeply lodged in the economy".

"There are growing fears of a 'malign scenario' where rising rates set off a debt compound spiral. The IMF has warned that borrowing costs may rise sharply as Japan’s aging crisis bites in earnest.

We track all foreign currency ETFs live here. The ETF for Japan Yen is FXY. Here are starddles for May, September and Janaury 2011:

These were computed with our StraddlesClac tool, which shows the maximum move required by FXY for the position to achieve profitability. In ths case, it's about 2.8% for May, 7.6% by September, and 9.5% for January 2011.

Options are dangerous and may cause 100% loss. This is not advice. Please do your own due diligence.

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