War Not Worth Winning as G-20 Debates Yen Intentions – Bloomberg 02-15-13

Salient to Investors:

Previous yen declines in the 1990s and early 2000s failed to pull Japan clear of 15 years of deflation. The IMF estimates that from From 1994 to 2003, Japan’s economy grew an average of 0.9 percent, a third of the pace of all advanced nations, and despite back-to-back annual declines of more than 10 percent for the yen vs. the dollar in 1996-1997 and 2000-2001.

 UK export growth has slowed despite a drop of over 20 percent in trade-weighted sterling since mid-2007.

Erik Britton at Fathom Consulting said Japan is succeeding at having the ugliest currency, but it won’t benefit their economy, as it has not helped the UK.

A declining currency hurts import-reliant companies and masks competitive weakness, and brings the risk that any benefits are wiped out and foreign retaliation sparks competitive devaluations. A FRB of New York study showed large movements in exchange rates typically have smaller effects on prices because the biggest exporters are typically the top importers, too.

Steven Englander at Citigroup says you can’t depreciate your way to prosperity – it’s a last resort and unlikely to succeed as well as believed. Englander said changing relative prices on international markets requires a deeper decline in the yen.

Jan Dehn at Ashmore Investment Mgmt said Japan will not break its deflationary expectation and exit its 20-year morass: companies aren’t investing much, Dehn sees no obvious solution and the situation ending in a major, ugly macro correction.

Izumi Devalier at HSBC said that a sustained 10 percent drop in the yen vs. the dollar could boost Japan’s GDP by 0.6 percent in the third year, but bring unwelcome side effects due to Japan’s reliance on foreign energy supplies. HSBC said energy accounted for 47 percent of all Japanese imports in 2012 versus 34 percent in 2010. Devalier said small and medium-sized enterprises may be especially hard hit as a lack of pricing power leaves headline sales unchanged while costs rise.

Marco Annunziata at GE said depreciation can provide a temporary boost, but is not a long-term substitute for faster productivity growth, stronger competitiveness, and sound macro policies.

Axel Merk at Merk Investments said a falling currency can undermine an economy’s competitiveness by making companies vulnerable to foreign takeovers and removing an incentive to innovate.

Read the full article at http://www.bloomberg.com/news/2013-02-15/war-not-worth-winning-as-g-20-debates-yen-intentions.html

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