Tags: yen | Japan | Europe | dollar

Is the US Turning into Japan or Europe?

Wednesday, 09 Jan 2013 07:40 AM

By Ashish Advani

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One of the few magazines I still read is the Economist. On the cover this week, the lead story is about United States turning into Europe. While it elicits a smile, I am not sure if the analogy is apt.

Yes, the United States has been sliding toward socialism since the financial crisis of 2008, but I believe we are quite different from the European mentality of socialistic redistribution of wealth.

The United States resembles Japan a lot more than it does Europe. The fiscal debacle that has been plaguing the United States is very similar to the one faced by Japan for the past 25 years now. What is shocking is that the American response to its financial crisis is also identical to that of Japan.

Japan started sliding into a deflation-induced spiral in the late 1980s. It decided to rescue the economy with a giant dose of stimulus. When that did not do the trick, it decided on another stimulus package. And then another and another. It has yet to stop trying to stimulate itself out of the funk 25 years later. The signs of a stimulus not working were evident by the 2nd attempt, but there was no political will to stop spending. Tampering with free market and artificially propping up the economy has never worked in the long run.

What has not worked in Japan for nearly three decades will not work here either. Yet it does not stop our beloved leaders and the Federal Reserve from announcing aid measures and fiscal stimuli when we do not have money to waste. Deficits are spiraling out of control, but our leaders do not want to cut spending or stop entitlement programs.

Japan’s economy has been growing at a very low rate with no specific industries booming. The deficits are completely out of control. The multiple stimuli have had no effect. Political parties win elections based on false promises to the masses as well as misguided policies.

Now substitute Japan with America in the above paragraph and you will see why I believe we are going down the way of Japan rather than Europe.

Talking about Japan, the new Prime Minister won on the election promise of weakening the yen and he has made large promises to have the Bank of Japan issue more fiscal stimulus, which will lead to the weakening of the yen.

So far the plan has worked. The traders in the markets have believed every word and the yen has weakened by about 10 percent in the last two months.

I believe the yen’s weakness is overdone and we are in oversold territory. While we may see the yen at 90 to the U.S. dollar (currently it is at 88), we will also see the yen spring later this spring. The classic adage of “buy the rumor, sell the fact” is very apt here. When the central bank action does not satisfy the market expectation that has been ratcheted up, we will see the yen come back strongly.

Mind you this is a contrarian idea and definitely against the popular trend of selling the yen these days. But if the Bank of Japan does not completely pander to the politicians (which I believe will happen as the central bank will want to assert its independence), we will see a lot of unwinding of the yen.

There are exchange-traded funds in the market that can aid you with the bet that the yen will strengthen in the coming months. I will be taking a long position in the yen and suggest you think about doing the same as well.

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