Société Générale’s Albert Edwards has been warning since the late 1990s that the West is heading for a repeat of the Japanese experience. His latest characteristically cheerful note explores one of the reasons for his prognosis.
He reckons Asia could be about to engage in a series of currency devaluations that will sharply lower import prices in the West and thus send us “a tidal wave of deflation”. The trigger will be a sharp slump in the Japanese yen.
Today’s currency markets remind him of the 2006/2007 period, when falling house prices “were totally ignored by upbeat equity investors”.
The yen could well plummet by another 25% against the dollar by the end of March. Quantitative easing (QE), or money printing, may not have much impact on growth, but “the one way I think QE really does work is via the exchange rate”.
Monetary loosening undermines currencies, and Japan’s central bank is by far the world’s most aggressive in this respect. It has bought assets worth 55% of GDP with printed money.
The Japanese economy is worth a third of America’s, yet its QE programme in dollar terms matches the US Federal Reserve’s at its peak. It’s clear that the Japanese “will do whatever it takes”.
Such aggressive QE being “spewed into the markets” implies a sharp drop in the yen. Technical analysis, moreover, suggests that once the yen is below ¥120 to the dollar, there is scant support until the 1998 low of ¥145.
The slump will give Japan a competitive advantage over its regional rivals. But South Korea, with an “anaemic” economy close to deflation, won’t stand for this “bone-crushing” treatment, and is likely to devalue the won.
In China, producer price inflation has already been negative for almost three years. It also won’t tolerate a huge yen decline. Prepare for a round of competitive devaluations that will worsen the West’s deflation problem.