Could the Big Yen Short Turn on a Dime?
The legendary investor sold his SPDR Gold Shares (GLD) holdings fast and furiously to partly finance his short yen position and made a cool $1.2 billion in profit (unrealized as of his December regulatory filing). The whole world has joined in.
But now the yen is poised to get a lot more cheaper, but for the opposite reason upon which the big yen short is premised. Allow me to explain.
The thinking goes that the theatrically aggressive devaluation of the Japanese currency, as affirmed by Federal Reserve Chairman Ben Bernanke and the G20 summit, would provide a long-needed boost to Japanese exports, right the sins of past timid actions by the Bank of Japan and make everything better.
The media have given more than enough coverage to the "lost decades" of Japan, which I argued in 2010 at Seeking Alpha should be considered a success story for the Bank of Japan considering the country's demographic trends.
But unless you follow the Japanese economy, you might not know that Japan has consistently run a trade deficit since early 2011 (see the chart below, generated at TradingEconomics.com).
The market's thinking is displayed by the dramatic rise in the Nikkei stock index, which has occurred in lockstep with the decline of the yen. Cheaper currency equals more exports, which equal a higher stock market. This is so simple an idiot would know it.
I have never bought into this currency war business, at least not in such simple terms. I mean, if economics were so simple, any idiot could be the head of a central bank. OK, that's already happened -- never mind.
Japan needs to import practically all resources, and would need to import even agricultural products if not for the stellar protectionist policies. Chinese manufacturing involves a large portion of value-added remanufacturing, importing components (along with raw materials) and exporting assembled products.
Sensitivity to exchange rates in these economies, I suspect, is much smaller than the common misconception. Furthermore, the sad fact is that Japanese economy has long lost its core competency. The nation completely missed the boat on the Internet revolution of the 90's and then on the mobile revolution. It also failed to hold ground in other industries -- even on TVs when flat-screens swept the world.
I don't have enough space here to offer an in-depth analysis of Japan's decline. Suffice it to say that such a prolonged, wide-ranging decline cannot be attributed primarily to a currency exchange rate. Nor can it be fixed with an exchange rate.