Tuesday, March 15, 2011

Roubini: Yen Will Weaken in the Long Run

I concur, though my thinking on why is somewhat different than Nouriel Roubini's.

Roubini told CNBC that:
Japan is going to need significant depreciation of the yen to increase its net exports because domestic demand is going to be anemic for a while. Therefore on a fundamental basis, the yen is going to be much weaker rather than stronger because you need improvement of external balance given the shock to the domestic economy.
Roubini is correct in that Japanese monetary authorities are likely to pump money to lower the value of the yen, which will be damaging to the economy. Where, I differ with Roubini is in his mercantilist/Keynesian view that this is necessary. It simply is not. The Japanese authorities should simply allow the economy to settle and form its own structure. It will be hard for Keynesians to swallow, but supply and demand works, even after a crisis.

Further, while it is savings not consumption that is the key to growth of an economy, it is hard to see how "domestic demand is going to be anemic", given that many people have lost their houses and most other things they own.

Another factor that would pressure the yen, according to Roubini, would be Japan's need to undertake a massive reconstruction effort. That in turn would further increase the country's fiscal deficit.

"The BOJ will have to decide whether they want to monetize this additional fiscal deficit...I think if there's going to be a much larger fiscal deficit, the BOJ might be induced to potentially buy more long term bonds," said Roubini.

Roubini is, unfortunately, correct here. Japan is likely to undertake a massive government reconstruction program, rather than allow the private sector to direct the recovery. This will distort the recovery, make it more bureaucratic and, yes, further weaken the yen.


  1. Good call on the domestic demand.
    I see hundreds of thousands of motor vehicles that will need to be replaced.
    Roubini must be thinking like the elitist he is and sees demand for Courvoisier and Cartier going down.

  2. I wonder what this disaster may have in store for the dollar as well. Will Japan cash in some of their U.S. debt to help finance the reconstruction efforts? If so, how much? I can only imagine what happens if China continues to cut its holding of U.S. debt and Japan, for obvious reasons, does the same. Who will buy up those U.S. Treasuries? The Fed? ;)