Mike, RE:"That said, do you think that Japan may survive simply because the rest of the G7 members will decide that it is too big to fail?" Yes, that is ultimately what I do believe. However, it is possible and indeed likely that there will be a LOT of Market angst in the coming months, because it is likely that the Japanese will drag their feet on real reform as long as possible. I think even with an election mandate from the people, the leadership will still be slow to respond, waiting until the house is burning before they call the fire department. Rubin and company are likely to exact tough concessions from Japan as part of a bailout package, which will be resisted on cultural and face-saving grounds. My scenario:
Between now and July 12 (elections in Japan): As the government has indicated, nothing will be done. The US and Japan may intervene a time or two more to prop up the yen, although that may be becoming a tougher sell in the US if the Japanese don't show any sign of implementing real reform, because if they don't, whoever is buying those yen for the US right now will suffer one hell of a loss in a real currency collapse.
July 12-13: The Japanese people will return a mandate for real reform.
(I think the markets will rise on this.)
After the elections: The Japanese leadership will return to a policy of doing nothing, if they can.
The wild card in all of this is that as the yen declines in value, the SE Asian regional economies are going down. If they collapse utterly, Japan WILL be largely to blame, (although they might try to shift the blame to the US for not "forcing Japan" into some kind of action) and saving Japan by that time may prove impossible. It is now the simultaneous collapse of SE Asia AND Japan that has to be avoided. The problem is now no longer as simple as "just" saving Japan. That is why, unlike Ramsey, I do not feel that the Asian flu is over by any means. I think that in the next 4-6 weeks, things are definitely hanging in the balance. I would be wary of any long positions until we get some kind of clearer picture of what's happening in both the region and Japan.
For what its worth, I think that Hashimoto wouldn't mind having the US force the issue. It's much easier (for him politically) than having to do the arm twisting inside the Japanese banking community (and government) himself. He may be trying to save his own political capital in forestalling things, but the game he's playing is perilous because of the effect it's having in the region. For example, although Clinton will try to extract concessions from the PRC about holding the line with respect to devaluing the Yuan, with each day of delay in Japan, that devaluation becomes more of a possibility. Indeed the Chinese may decide to do it before Clinton arrives so that that is no longer on the table, although this scenario is unlikely. The point is, they cannot hold the line forever, and the growing weakness of the yen is putting tremendous pressure on them.
jess. |
