Europe, Japan and Australia – and US Taxes
This is still the Year of the Euro – it is important to remember that much of the turmoil in the world economy – including the apparent U.S. ‘growth recession’ (a slow recovery with little or no job growth, resulting in an increase in the unemployment rate) is directly the result of the European sovereign debt crisis (Starring Greece but with Spain, Portugal and Ireland all definitely contending for Best Supporting Actor).
Now comes word that the recent, apparently successful, ’stress tests’ of the European banks may have very significantly understated the vulnerability of at least some of those banks to government debt risks. The immediate market response – stock market turmoil and the EUR/USD dropped over 200 pips in less than 24 hours – erasing two-thirds of the ground it had gained over the previous two weeks.
It did not help matters that German factory orders were off as well- adding fuel to that fire. Of course, the Euro also fell against the Yen – it is has now effectively erased about 90% of the gains it had made against the Yen over that same time period.
Meanwhile, Ms. Gilliard persuaded the final two independents to support her Labour party bid to form a government – giving her the 76 seats that she needed to (just barely) hang on to power as Prime Minister – but undoubtedly at a very high price indeed.
The market reacted by sending the Australian dollar down (including against the Yen). From a technical trading standpoint: has anyone else noted that the AUD/JPY has formed an almost perfect symmetrical triangle since May 21 – one with an over 800 pip technical target if the AUD/JPY drops out of it in a further decline?
Chart patterns are very effective at showing us what the market is set to do if the fundamentals do not change.
Meanwhile in the U.S. the administration has announced a plan to push for a small amount of ‘targeted’ tax cuts to support business plus an additional modest infrastructure construction plan as the bold measures which surely stimulate the economy into moving again.
In addition the President has announced that there is absolutely no way he will support an extension of the Bush era tax cuts- even though serious economists, like Mr. Berner at Morgan Stanley, point out that failure to do so will shave about 3/4% off of what already appears to be shaping up as very modest growth for 2011.
The market has not been impressed with this. As a result of all of this- and some somewhat better but still disappointing economic news in the U.S. – The US dollar continues what Bloomberg reports as the ’slow downward grind of the US dollar vs the yen’.
Did I mention that the New Zealand dollar has fallen against the Yen due to the recent earthquake there?.
There is a theme here- the Yen is strengthening across the board. And the Bank of Japan met this week and did nothing.
They did not even take the normal amount of time to do nothing. I was shocked to read of the Bank of Japan’s decision yesterday morning- In my experience the earliest that the BOJ has ever reported out from a meeting. In its statement it acknowledged that deflation is a significant problem – "The bank recognizes that Japan’s economy faces the critical challenge of overcoming deflation" but then, in the second half of the very same sentence the BOJ spoke of "returning to a stable growth path with price stability,".
Translating from Economese this means that the BOJ is still more scared of inflation than deflation- the phrase about deflation is still largely window dressing. Of course, it is also true that the BOJ just had an emergency meeting last week and expanding their short term lending facility to provide liquidity assistance to Japanese companies. But these are very short term (3 to 6 month) loans- carefully calibrated to have the least possible effect if the intent was to change the strength of the currency. But deflation is a serious danger to an economy- and it has become a political danger to both the Japanese government and the BOJ itself.
The refusal to take realistic steps to weaken the Yen may soon come back to haunt the BOJ- perhaps as early as next week. On September 14 (the afternoon of September 13 on this side of the International Date Line) the Democratic Party of Japan will be holding a party conference. At that conference Mr. Ichiro Ozawa (who created the DPJ) is challenging Prime Minister Naoto Kan for the leadership of the party (in a Parliamentary system this means that Mr. Ozawa would replace Mr. Kan as Prime Minister).
The centerpiece of his campaign: A promise to take strong measures to directly intervene to weaken the Yen. Mr. Kan may have enough votes to fend off Ozawa without needing to promise similar action- but what if he doesn’t? What if the price of staying Prime Minister is a promise to take strong measures to weaken a too strong Yen?
And why would he not make such a promise when he too has noted that deflation is a serious problem- and that weakening the Yen is probably the quickest way of solving the problem? He might want to bow to the feelings of the board of the the BOJ? Why, when arguable they have just humiliated him with their half hearted response?
This is still the Year of the Euro (and we will no doubt be hearing more from Europe soon) but Monday evening I plan to be looking for news from Japan- and I would strongly encourage others to do so as well.