Tuesday, January 31, 2012

Japanese Yen: The Next Currency Crisis ?

We now have a debt crisis in Europe, that could well turn into a currency crisis. In the meantime, the Japanese Yen (JPY) is stronger than ever, although Japan's public debt to GDP has reached an amazing 220% of GDP.

The reasons for the strength of the Japanese Yen have been  its low external debt (most debt is owned by Japanese), large reserves and current account surplus.

However, Japan had a trade deficit in 2011, the first time since 1980 (See chart below courtesy of Trading Economics). The current account was still positive, but greatly reduced compared to previous years. If the trade deficit was to continue it could weaken the Yen, making it less of a safe heaven, and increase interest rates, which could snowball into a debt crisis and quickly deteriorate in a currency crisis.

Many people see Asian currencies, as being strong currencies. However, in 2011, with India debt to GDP over 90%, the Indian Rupee declined by up to 15% against the US dollar, although it recently rallied somewhat.
What really destroys a currency is debt. Any currency with large amount of debt is at risk nowadays. There are not many fiat currencies that could qualify as safe haven now. For that reason, I don't consider the Japanese Yen and (especially) the US dollar as safe investment at least in the long term.

If you want to learn more about the Japanese Yen risk, check Mish Shedlock and Kyle Bass.

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