With the huge earthquake and tsunami in Japan one wasn’t surprised that there was an increase in demand for gold. Investors generally buy gold as a hedge or safe haven against any economic or political event. In this case a natural disaster. Below is the price of gold – notice the increase in price to US$1431.60 per ounce.
This event reminded me of a scene from The Corporation DVD with Carlton Brown, a commodities trader at the NYSE. He describes the tragedy of 9/11 as a blessing in disguise because for some people, it translated into great riches. Brokers celebrated the death and destruction of the Iraq war because “in devastation, there is opportunity”. An unfortunate way to look at how the market sometimes works when you consider the death and devastation in Japan.
With the terrible events overnight in Japan one wonders how the Japanese economy is going to be affected. However it was interesting to notice what has happened to the Yen against the US$ and the price of oil.
The US$ dropped against the Yen – was ¥82.8 but now is ¥81.8. Reasons for this:
1. The flow of insurance pay-outs that will no doubt follow the earthquake/tsunami.
2. Companies repatriating funds as happened after the Kobe earthquake in 1995
Benchmark Brent crude oil contracts fell 1.1 per cent to $114.16. Reasons for this:
1. The closure of Japan’s refineries damped immediate demand for crude oil.
2. Considering Japan’s huge oil consumption, around 4.4 million barrels a day, investors feared the demand would fall after the disaster at least temporarily, triggering large scale of sell-offs across markets.
According to the FT in London:
Natural disasters can actually be positive for growth because governments spend to repair the damage. After the Kobe earthquake in 1995, the Nikkei fell about 8 per cent in the following five days, then recovered 5 per cent in the next two weeks.
In a broader sense this earthquake is probably the last thing that the Japanese economy needed – namely its ability to pay in order to get the country back to a growing level of economic activity. However, although Japan’s government is highly indebted its people are very wealthy and there are many ways that you can tap into this wealth.
It seems that oil prices will be downward until the damage in Japan is fully assessed. But there always remains the threat of further political turmoil (sorry about the pun) in the Middle Eastern countries.
Brian Fallow wrote an interesting piece in the NZ Hearld this week. He outlined the different policy stances by both National and Labour with regard to exchange rate intervention.
*National still maintain that intervention is not a viable option to reduce the value of the NZ$. They cite the experience of the Bank of Japan in the 1990’s and their attempt to devalue its currency – the Yen went from 330 to 80 against the US$.
*Labour favour the RBNZ intervening more actively to reduce volatility of the currency as it becomes difficult for exporters to plan ahead.
The recent QE2 by the US Fed has caused the US$ to fall against all major currencies. This with the Chinese resisting moves to allow the Yuan to appreciate faster against the US$ leads to the appreciation of everyone else’s currency. If NZ embarks on a competitive devaluation to make exports more competitive, by the RBNZ selling NZ$ on markets, there will be costs:
1. The extra dollars would be inflationary
2. The weaker NZ$ would make imports more expensive which may impact on higher input costs
3. With a weak labour market firms may pass on some of cost to their workers via lower real wages.
4. With inflationoary pressure a tightening of monetary policy might be required – higher interest rates. This will attract capital inflows and increase the value of the US$.
5. This would increase Government debt which puts pressure on the taxpayer.
However it is hard to conclude that there would be no benefits from a weaker NZ$. In 2007 the RBNZ did intervene in the foreign exchange market and sold NZ$. At present it would be hard to make the case that the NZ$ is unusually high – it is still 6% lower aginst the US$ than it was in 2007.
From the Wall Street Journal – criticisms Ben Bernanke made of Japan’s central bank a decade ago—saying it was too timid in stimulating Japan’s economy to prevent deflation—give hints of what the Fed’s next steps might be. As a Princeton professor in the 1990s, Ben Bernanke lectured Japanese officials for mishandling their economy. In a 1999 paper, Mr. Bernanke lashed out at Japanese officials, saying their country’s woes were the result of their own “self-induced” paralysis. Japan’s responses to deflation, he charged in atypically blunt terms, were confused, inconsistent and too cautious.Today, Tokyo’s economic problems are more than academic for the Federal Reserve chairman. They are a window into his own situation as he stares at what could be a long period of slow growth, high unemployment and declining inflation in the U.S. There are two lessons from the Japan experience:
1. be aggressive about providing stimulus to the economy in the early stages of a downturn and
2. avoid canceling it too soon.
Click here for the article in the Wall Street Journal. Also an informative interview with columnist Jon Hilsenrath
China has now overtaken Japan as these second largest economy in the world behind the USA. However, despite the huge development in infrastructure and modern conurbations China is still a developing country. Its GDP/capita last year was US$3,600 compared with Japan’s which was US$37,800. Between 2000 – 2008 Japan’s economy grew 5% compared to China’s 261%. Astonishingly GDP growth in China was 11.9% over the last quarter and over the last few years it has weathered the financial crisis very well. Some economists are uneasy about China’s reliance on exports and there is a need to increase local consumption to keep industry and GDP moving. But wage growth has been limited relative to GDP so one wonders how domestic consumption can increase at the rate required. The video clip from Newsy.com is quite informative. They source news from all the main media outlets.