Welcome to the Currency War, Part 9: What's Wrong With These Pictures?
Japan's currency devaluation has worked beautifully. The yen is plunging, Japanese stocks are soaring, and the current account surplus -- the main measure of a country's ability to trade effectively -- is way up:
Japan Current-Account Surplus Climbs as Abenomics Sinks Yen
Japan's current-account surplus rose in March to the highest level in a year as a depreciating yen boosted repatriated earnings and brightened the outlook for the nation's exports. The excess in the widest measure of trade was 1.25 trillion yen ($12.4 billion), the Ministry of Finance said in Tokyo today. That exceeded the 1.22 trillion yen median estimate of 23 economists surveyed by Bloomberg News.
Prime Minister Shinzo Abe's revamp of Japan's central bank to focus on ending deflation paid off when the yen today slid past 101 for the first time since 2009, helping exporters such as Toyota Motor Corp. (7203), which now sees its highest annual profit in six years. Sustaining a current-account surplus may help to maintain confidence in the nation's finances as Abe wrestles with a debt burden more than twice the size of the economy.
"The currency's depreciation is buoying Japan's income from overseas investment at a pretty solid pace," said Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo. "A weaker yen provides support for Japanese exports."
The dollar versus the yen over the past year:
Here's where it gets interesting: Measures like exchange rates and trade balances are relative, so Japan's gains must by definition come at the expense of its trading partners. That is, the flip side of a weaker yen and rising Japanese trade surplus is a stronger dollar and deteriorating US trade balance. This hurts corporate profits, so to the extent that a cheaper currency and rising current account balance makes Japanese stocks go up, you'd expect US stocks to be doing the opposite. But that's not the case; both stock markets are way up (S&P 500 blue, Japan's Nikkei 225 green).
What does this mean? Either currency exchange rates and trade flows no longer affect national economies, or they still do and US companies are looking at a sudden, sharp deterioration in their ability to sell abroad and compete at home.
This is consistent with the general currency war script: One country devalues, reaps some short-term rewards at the expense of its trading partners, who then retaliate by devaluing their currencies. Which means, probably, that the US and Europe are about to follow in Japan's footsteps.