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Will a Weak Yen Save Japan from Deflation?

Last updated 4/13/2009 2:37 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Japan’s wholesale prices fell at the fastest pace in almost seven years.  The Domestic Corporate Goods Price Index slumped by -2.2% on a year over year basis as industrial output contracted by double digit rates. The Bank of Japan’s overseas commodity index, which tracks changes in the cost of oil, steel, copper and wheat, slid 49.3% in March.

The decline in wholesale prices has reignited concerns that Japan is sliding back into deflation that has haunted the country for most of the past decade. With rates already at merely 10 basis points the BOJ has run out of room to stimulate the economy by standard monetary policy actions and may have to rely on some form of quantitative or qualitative easing going forward. For the time being Japanese policymakers have  opted for fiscal rather than monetary stimulus with Prime Minister Aso today announcing a $164 Billion plan worth 3% of the GDP.

USD/JPY saw little movement in response to the news trading in a very tight range from 100.20-100.50 for most of the Asian session. With many of the markets in the region still closed for Easter holiday, trading  will likely remain moribund for most of the day and the pair should continue to move in tandem with risk appetite rather than my micro economic data. 

Since February, 2009, the yen has weakened considerably with USD/JPY rising by more than 1000 points from 88.00 to now over 100.00  Ironically enough it is precisely the decline of the yen rather than any belated monetary or fiscal imitative by Japanese authorities that may have the greatest impact on the country’s growth and inflation rate going forward. 

Just as the rise of the yen had a vicious deflationary impact on Japan’s economy by depressing demand for its exports and lowering the cost of its  imports, so the fall of the yen now should reverse some of this dynamic assuming currency remains at these levels or trades lower for significant amount of time.  Therefore despite Japanese policymaker’s best effort s to stimulate the economy, the success or failure of their mission will most likely be dictated by the currency markets rather than any policy action on the monetary or fiscal front.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.