04 September 2007

Leads From Japan

Japan is the worlds second largest economy on earth by far and now looks to be leading the world in the race to recession, as reported in The Telegraph.

As the latest weak data hits, optimists are now few and far between, writes Ambrose Evans-Pritchard

Japan's economy has slowed sharply over the summer and may now be on the brink of recession, dampening hopes that Asia will buttress world growth as America battles the sub-prime housing crisis.

In the latest grim data, Tokyo said wages had fallen for the past eight months in a row. The cumulative fall over the past year to July has been 1.9pc, evidence of how intractable deflation can become once lodged in an economy. Business investment fell 4.9pc, with the pace of decline gathering speed in recent months.

The seemingly endless string of weak data from Japan comes amid mounting concern in Washington that the US economy is starting to buckle, and possibly tipping into a severe slump.

And a couple of other snippets:

*According to Bloomberg reports, the mood at the gathering turned ever blacker as speaker after speaker warned that the economy may be on the cusp of a sudden downward dive.

*While Fed chairman Ben Bernanke said the bank would "act as needed", he cautioned the market not to expect an instant bail-out. "It is not the responsibility of the Federal Reserve to protect lenders and investors from the consequences of their financial decisions."

*Japanese investors have taken a beating on the yen "carry trade", where they borrow in Tokyo to chase higher yields around the world. The Bank for International Settlements said in its quarterly report yesterday that the overall yen carry trade has reached $1,050bn and the Swiss franc sister trade is $678bn.
Lots more in the full article.

The last point brings me to the inevitable chart. The Yen has been a useful leading/confirming indicator for movements in the US stock market. The chart below shows the recent action of The JPY/USD futures in candles with the S&P500 in bars and show the clear inverse correlation between the two.

This begs the question: Does the unwinding of the carry trade have implications for the fortunes of the US stock market, because the is cause the liquidation of stock positions? Or is it the other way 'round: Does the liquidation of stock position cause the repatriation of Yen, resulting in the unwind?

I don't know and would be interested in the answer if anyone has data on this.

In any case, the technical picture in the Yen looks bullish above the trendline. My best technicians guess is that it remains support. (50/50 proposition of course) That would not be good for the indexes.

In any case, Uncle Ben seems reticent about bailing institutions out of malinvested trouble. Could this mean he will hold rates in September? That could well spark off another savage sell-off.

According to Austrian economic theory (as per the videos I posted a couple of days ago), that would be the best course of action, just let it tank, have a speedy liquidation of malinvestment, let the flaky institutions/businesses go to the wall and get on with life after that. I've always thought that too.

Then we could all have the prospect of a "healthy" growing economy again. It is just a shame political imperitives and demands for institutional welfare intervene.

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