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  • Hello, and welcome to FT Markets.

  • The topic today is currency wars.

  • Central banks around the world are trying to stimulate their economies,

  • and to do this, it would be helpful if the currency would lose value, stimulating trade.

  • The problem is, however, not all currencies can fall at once.

  • But Japan has become the latest bank to join the negative rates club.

  • It now costs money to save money in Japan.

  • To think about the consequences for the Yen, we're joined by Jim Reavis of M&G investments.

  • Welcome, Jim.

  • Hello.

  • So I think you've got one great chart here which really can set the scene for us and give us the long-term context about what's happening.

  • Yes, so I mean. If you got back to 1970s you would see a gradual appreciation of the Japanese Yen against the US dollar

  • all the way through really until 2 or 3 years ago when suddenly the US Dollar becomes the global currency of choice.

  • Now, the blue line on this chart is showing you purchasing power parity.

  • Now, what does that mean?

  • Well, it's the old Big Max index that the economists published.

  • Um, it basically shows you if you could buy exactly the same good in one country and export it to another country.

  • Once you've converted the currencies to adjust for that, in which country does the Big Mac look expensive and in which one does it look cheap.

  • And you see for the chart now that, people have this perception of Japan being ferociously expensive economy.

  • Going back to the 1980s boomer, an expensive place to buy stuff and do business.

  • Actually, that's not the case anymore.

  • And if you look at PPP, your Big Mac in Tokyo is very much cheaper than it is in United States or elsewhere in the world.

  • To the extent that it looks as if the Japanese Yen is fundamentally undervalued right now.

  • The bank of Japan although, uh, would like to make that even cheaper.

  • In order just to stay to stimulate its economy and to throw off those speculators

  • who built up quite aggressively long positions in the Japanese Yen over Christmas and as we started in 2016.

  • So are you saying we should buy the Yen right now?

  • Or is the central bank sort of fighting it going to stop this sort of resetting of the currency

  • back towards that sort of fundamental place where it should be?

  • Well, they'd like to keep it cheap.

  • Um, the question is, how much more can I do in this?

  • You know, we talked about the three hours of Japanese policy, *

  • monetary policy, fiscal policy, and then structural reform.

  • I don't think they've got a lot more room to do more things on the monetary front.

  • They've already got negative interest rates, have done lots of lots of quantitative easing.

  • Have they really got the ammunition and the will to send Yen even further down?

  • I think the answer is no, for many reasons.

  • But included within that, do they really want to generate much more inflation within Japan?

  • We have elections coming up for the upper house later this year,

  • and Abe really wants to win a big two thirds majority there to change the Constitution.

  • But a lot of his constituents that he'll need to win the election don't even like inflation of even half a percent.

  • So, given we have seen a minus sell off in the end of last week or so

  • and the back of the negative rate,

  • surprise, it probably is the time to be back in the end once more.

  • And I guess the flip slide of that is the dollar,

  • and what about dollar strength

  • not just against the Yen, but against sort of the world's other currencies.

  • Basically, the dollar has been in the currency of choice for the last year.

  • Yeah, and I'm looking back to the history

  • one thing that worried me for being a dollar bull was that once the Feds starts the hike,

  • in the past four right hiking cycles, actually the dollar didn't quite get back in the next six months.

  • I think the thing that is different this time is that the Fed is the only gamer in town, no one else is ready to hike interest rates.

  • On the flip slide if you wanted to put a bit of mitigation on that bullet shot for the dollar,

  • well, the Chinese are selling a lot of dollars at the moment.

  • They liquidated maybe a hundred billion of US treasuries towards the end of last year.

  • They'd like to keep on selling both to support their own currency so the risk is going to be this perpetual dripping of Asian Central bank money out of the dollar,

  • but the fundamentals, the growth story, the interest rates story mean probably the dollars stay strong from here on in.

  • Great, thanks a lot for that Jim.

  • So, as the currency wars continue,

  • what we have is the fight between the fundamentals and the central bankers.

Hello, and welcome to FT Markets.


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