Darleen,
I'm interested in Hutch's answer as well, but here are a few thoughts from my corner.
The perception is that Japan is recovering. I think it is a false perception given the continued problems they face with NPLs (non-performing loans) in their banking sector.
There are two ways for Japan to recover economically that I can think of. Export there way back to a semblance of health or increase domestic spending by their deposit holders.
To export their way to health STRONGLY depends on maintain a favorable exchange rate. If the yen gains strength against the dollar then their exports will fall off as they become more expensive in the US markets.
Furthermore, if the yen strengthens, then Chinese goods become even more competitive with Japanese exports to the US increasing the pressures on their exporting profits since the yuan is not being floated in the currency markets. Now we know that there are rumours of a Chinese devaluation and that will put that much more pressure on the BOJ to keep the yen weak.
But the more pressing issue is for Japan to monetize its HUGE national and domestic debt. They can't use interest rate decreases to stimulate their economy, so they have little choice except to print yen and make those NPLs become devalued through deliberate inflation/devaluation of the yen.
Japan will become the world's largest debtor nation, and it will be done at the expense of their retirees who have their money sitting in postal savings banks drawing anywhere up to 7% while the current borrowing rates are .25 to .50 percent. This is the political problem they face. Devaluing the yen effectively will devalue the savings of their retirees. However, they just don't have any other choice, just like the US didn't have a choice in 1933.
When that occurs, the dollar will strengthen against the yen very strongly, hopefully permitting increased economic growth in the US as prices for imported goods decline even more. But the down side with be the serious balance of trade issues and likely calls for protectionism.
It will be interesting to see how gold fairs when Japan finally bites the bullet and does what they have to do. Since "inflation" in the US will almost non-existent because of this Japanese monetization, the Fed will have to increase liquidity to prevent a collapse of prices.
Thus, I think gold will continue to decline because the Fed is voluntarily striving to maintain the parity with the Yen and will seek to keep the dollar from growing too strong. Substantial japanese savings will likely come flooding to the US seeking a safe haven from a yen devaluation, unless such a devaluation is done quickly before the public catches wind of it.
Hutch, would you like to step in here and tell me where my logic is screwed up (anyone else si welcome also)??
Regards,
Ron |
