WILL JAPAN DESTROY THE YEN TO SAVE THE DOLLAR?

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As the Japanese government continues holding short-term interest rates near zero while printing yen like it is going out of style, getting out of the yen has now replaced pachinko as the national pastime for rank and file Japanese. With housewives and cab drivers debating the best techniques to exchange their yen savings for higher yielding non-yen assets, the Japanese monetary authorities are facing the prospect of the complete destruction of their own currency, subjecting their citizens to the horrors of hyperinflation. . .

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The question is why are they doing it? The only logical answer I can offer is that the Japanese realize that if they stop the flow of global liquidity they will destroy the dollar and the U.S. economy. To survive, the U.S. must be able to both limitlessly exchange the dollars it prints for the goods the rest of the world makes and then pay low rates of interest on its IOU’s that foreigners accumulate as a result. Were the Japanese to turn off the monetary spigot and raise interest rates to normal levels, Americans would not be able to do either.

A real rate of interest on the yen would reverse the carry trade by creating demand for Japanese assets and diminishing demand for dollar denominated assets. Such a move would simultaneously send U.S. interest rates and consumer prices thought the roof and stock and real estate prices through the floor. The entire U.S. consumer economy would collapse and Americans would experience the greatest period of economic hardship since the Great Depression.

This scenario apparently terrifies the Japanese, as they fear that such a severe recession in American means similar problems for Japan. However, their fears are misplaced as their real problem is the enormous cost of trying to prevent this from happening. Their fixation on what might happen to Japan if the American economy were to run off the rails has blinded them to the far greater costs of trying to keep in on track.

Therefore, the Japanese need to carefully consider what they are doing. They need to ask themselves whether propping up the U.S. economy, merely delaying its inevitable collapse, is really worth the destruction of their own currency and the potential chaos that might create for their own economy? Do they really want to commit economic hara kiri just to keep their short-sighted vendor financing scheme going a while longer. Hyper-inflation would be the monetary equivalent of an atomic bomb. Will the Japanese really let us do it to them again? If they come to their senses soon, as they must do to avoid this fiasco, this time it will be the Japanese that drop the atomic bomb on us!

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http://www.europac.net/newspop.asp?id=9132&from=home

[nebenaube]

1. IIRC...

They sort of vowed to defeat us economically after they surrendered in 1945.

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2. Yes, that thought crossed my mind too. . .

Right nebenaube, I think you're spot on. We've all heard quite a bit in recent months about the threat from China's possibly calling in all of our loans.

But this is the first time I've seen the "Yen carry trade" explained in a way that suggests that a severe economic threat might come from Japan as well.