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Tuesday, November 06, 2012

Yen Vs. RMB - China crippling Japanese companies?

Yves Smith asked "Has Chinese Currency Manipulation Succeeded in Breaking Japanese Manufacturers?" bringing out the effects of currency management. You can read the sorry strategic choices facing the Japanese regulators.

China is buying yen forcing appreciation that renders Japanese companies less competitive. China is also buying Japanese bonds. Now Japan must buy US Dollar to keep their exports competitive. Now, both countries are dependent on US/EU/developed world demand and hence they are fighting amongst themselves to capture the reducing developed world consumption share.

This is a problem you face when the market country undertakes QE. The supplier country has no choice but to undertake its own QE without which it suffers loss in competitiveness. The quantum of QE the supplier country must undertake is not merely equivalent to QE undertaken by market country but must also adjust for QE by other supplier countries and relative competitiveness between suppliers inter se. Thus, the supplier countries must do a lot more and therefore must face correspondingly lot more risks.

Thus, my advice to Japan would be to print till balance is restored. (This is not my optimal recommendation but I believe this will be best way to achieve their intent.