Albert Edwards: The yen will plummet

Société Générale’s Albert Edwards foresees deflation in the West brought on by a devalued Japanese yen.

Socit Gnrale's Albert Edwards has been warning since the late 1990s that the West is heading for a repeat of the Japanese experience. His latest characteristically cheerful note explores one of the reasons for his prognosis.

He reckons Asia could be about to engage in a series of currency devaluations that will sharply lower import prices in the West and thus send us "a tidal wave of deflation". The trigger will be a sharp slump in the Japanese yen.

Today's currency markets remind him of the 2006/2007 period, when falling house prices "were totally ignored by upbeat equity investors".

The yen could well plummet by another 25% against the dollar by the end of March. Quantitative easing (QE), or money printing, may not have much impact on growth, but "the one way I think QE really does work is via the exchange rate".

Monetary loosening undermines currencies, and Japan's central bank is by far the world's most aggressive in this respect. It has bought assets worth 55% of GDP with printed money.

The Japanese economy is worth a third of America's, yet its QE programme in dollar terms matches the US Federal Reserve's at its peak. It's clear that the Japanese "will do whatever it takes".

Such aggressive QE being "spewed into the markets" implies a sharp drop in the yen. Technical analysis, moreover, suggests that once the yen is below 120 to the dollar, there is scant support until the 1998 low of 145.

The slump will give Japan a competitive advantage over its regional rivals. But South Korea, with an "anaemic" economy close to deflation, won't stand for this "bone-crushing" treatment, and is likely to devalue the won.

In China, producer price inflation has already been negative for almost three years. It also won't tolerate a huge yen decline. Prepare for a round of competitive devaluations that will worsen the West's deflation problem.

Recommended

The currencies to bet on this year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
James Anderson: investors must pay "high multiples" for tech stocks
Tech stocks

James Anderson: investors must pay "high multiples" for tech stocks

Investors must be willing to pay “unreasonable prices” for high-tech growth stocks to take advantage of the huge potential returns that these companie…
14 Sep 2020
Daniel Loeb: fiery activist goes on a buying spree
People

Daniel Loeb: fiery activist goes on a buying spree

Daniel Loeb is known as a sharp-tongued investor who buys stakes in companies and then shakes them up. But the pandemic caught him flat-footed and he …
14 Sep 2020

Most Popular

Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020
The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020
Why you should stuff your end-of-pandemic portfolio with Chinese stocks
China stockmarkets

Why you should stuff your end-of-pandemic portfolio with Chinese stocks

For an end-of-pandemic portfolio, you need assets that can cope with today’s volatility. And that, says Merryn Somerset Webb, means Chinese stocks.
14 Sep 2020