An earthquake and tsunami devastate Japan and the country hangs on the edge of a nuclear disaster, and the yen soars to a post-World War II high of 76.25 against the dollar.

An earthquake and tsunami devastate Japan and the country hangs on the edge of a nuclear disaster, and the cost of insuring against a default on Japan’s government debt in the credit-default swaps market rises to an all time high.

Seems perverse, no? The sell off in the stock market on fears that one or more Japanese reactors was headed to a meltdown and then the reversal just days later when stocks rallied on hopes that the meltdown could be averted seems completely understandable in comparison. Sell-off to rally is just the normal stock market yo-yoing when nobody has enough information for a rational decision.

But this other stuff—strongest yen since WWII and simultaneously the greatest danger ever that Japan’s government would default—that’s just nuts, right?

No, perverse it may be but it’s perversely logical. And if you can get your mind wrapped around why it makes sense for the yen to rally while Japan’s governmental debt gets dissed, then you might have a chance of figuring out whether Japan’s need to go hundreds of billions of dollar further into debt in order to finance a post-tsunami reconstruction is going to be good or bad for the bonds of the deeply indebted United States.

Okay, seat belts tight? Let’s go for a bumpy ride in the global financial markets. Read more

Japan’s yen intervention has failed–which means Japan will intervene again to weaken its currency against the dollar

Now that worked out just swell, didn’t it?

Remember way back on September 15 when Japan intervened in the currency markets to drive down the soaring yen. The yen had just stormed through the 83 yen to the dollar level that a number of large Japanese exporters had pegged as the exchange rate where they stopped making money.

By buying U.S. dollars and selling yen the intervention succeeded in driving the yen down to an exchange rate of 86 to the dollar.

Temporarily.

By October 6, the yen had climbed back to the exchange rate that prevailed before Japan intervened and then some. The yen closed yesterday, October 11, at 82.70 to the U.S. dollar.

It’s likely that the yen will keep climbing too—even if fears that the Bank of Japan will intervene again restrains the rate of that climb. On October 11 the yen, which had strengthened to 81.36 to the dollar, fell back to 82.70 on fears that the Bank of Japan would move.

I understand the fears. Currency traders have been loading up on short positions against the dollar. They know they’re exposed because of the size of those positions and that makes them nervous. And as I’ve written a number of times recently the dollar is so oversold that a short-term bounce is looking increasingly likely. (For more see my post http://jubakpicks.com/2010/10/11/watch-the-dollar-while-the-medium-and-longer-term-trend-is-still-down-the-u-s-currency-is-looking-like-it-wants-to-bounce/ )

But most currency traders believe that they’ve got weeks yet before the Japanese government intervenes again. The argument goes that the Japanese government won’t intervene to weaken the yen until after the G20 meeting in Seoul that ends on November 12. Intervening before a meeting where currency interventions will be a hot topic would be just too provocative and would expose Japan to renewed criticism that its intervention has stoked an already worrying currency war.

Even though smaller Asian countries such as Thailand, Taiwan, Malaysia, the Philippines and even host-nation South Korea look like they have intervened in the currency markets last week.

But with the yen hitting a new15-year high against the dollar, I expect that Japan will intervene after the meeting ends unless G20 officials can cobble together a deal with China to allow the renminbi to appreciate. And with China signaling its reluctance to even discuss a deal, the odds are very low that the G20 meeting will yield anything that would be definite enough to head off another Japanese intervention to weaken the yen.

It’s not just Japan: Brazil is trying to drive down the price of its currency too

Japan isn’t the only country to intervene in the markets in an attempt to drive down the price of its currency.

Brazil’s central bank has moved to buy dollars and to sell the Brazilian real repeatedly in the last week. Until it fell on September 20 and 21, Brazil’s currency had been up 34% since the beginning of 2009. That appreciation has played havoc with the country’s exports. The country’s current account trade deficit is forecast to hit $50 billion by the end of 2010 from $24 billion in 2009.

Brazil’s central bank intervened at a pace of about $1 billion a day—buying the U.S. dollar and selling the real –last week. And on September 21 the Brazilian government announced that the country’s sovereign wealth fund had been authorized to buy dollars and other foreign currencies without limit.

All that seems to have had some effect: on September 20 and 21 the real retreated 0.7% against the dollar.

The government hopes that these measures won’t have to continue indefinitely. Investors have moved dollars and other foreign currencies in bulk into Brazil in preparation for the $81 billion Petrobras stock offering on September 23. Investors buying in Brazil—which meant paying with the real– received priority over overseas buyers.

I think that the government is going to be disappointed. Read more

It’s starting to feel a little bit like June 1930. And that’s worrying.

In that month President Herbert Hoover, despite deep misgivings, signed the Tariff Act of 1930, known as the Smoot-Hawley Tariff after its two authors, into law. By raising U.S. tariffs, the act set in motion a competitive trade war that devastated the global economy and helped create the Great Depression.

Watching the unilateral decision by the Japanese to intervene in the currency markets to force down the price of the yen in order to protect Japanese exports, I’ve started to worry about a replay of that history. This time the starring role would go to competitive, beggar-your-neighbor currency interventions and not to any tariff.

But the effect could be the same: Each of the world’s governments acting to protect the interests of its own economy would kill off growth in the global economy.

It’s still just a worry mind you. And we won’t head down this path to lower economic growth unless Japan gives signs that it’s not content with a relatively small drop in the yen and Europe and China star to retaliate to protect their own exports. But the consequences would be so disastrous that I think it’s worth understanding how this yen intervention could trigger Smoot-Hawley II. Read more

Can anyone stop the appreciation in the yen? Not the Bank of Japan or the country’s government it appears

Talk about a no-win situation: Japan’s central bank is damned if it doesn’t intervene to weaken the yen and quite possibly double-damned if it does.

The Japanese yen climbed yesterday, August 31, to 83.92 to the U.S. dollar. That’s near the 15-year high for the Japanese currency. At recent prices Japan’s exporters are getting killed. Growth in Japanese exports slowed in July for a fifth straight month. As you’d expect shares of Japanese exporters led the Nikkei 225 down again. Toyota Motor (TM), for example, fell 2.4% for the day. Canon (CAJ) dropped by 4.5%. The Nikkei declined to 8824, a 16-month low.

The Bank of Japan and the Ministry of Finance have tried talking the yen down to no avail. They’ve announced a new stimulus package and extended a cheap-loan program. And the political pressure for the bank to do more has intensified.

It’s clear what the bank could do. It could sell yen into the market. In theory that extra supply of yen would drive down the price of the Japanese currency.

But here the bank faces some disconcerting recent evidence. Read more