Monday, February 2, 2009

It's Worse in Japan

The US is moaning by the side of the economy, clutching its cuts and bruises and complaining that the ambulance is taking too long to arrive.

Japan is lying quietly nearby, bleeding to death.

Frank Veneroso, who's invested in hedge funds for the World Bank along with many other big, big clients, says the Japanese economy is in the worst state ever - already worse than America's Great Depression. Industrial output could take just four months to fall almost as much as the total decline during the 30s in the US.

This is straight from Veneroso:

I have been writing about an Asian black hole for almost two months now. I have been crying from the rooftops about an emerging depression in Japan. It has been as though a neutron bomb had gone off in the world. There was no one who seemed to notice, no one who seemed to listen.

Every week it gets worse and worse and worse. Today it was Japan....

THERE HAS NEVER BEEN DATA THIS BAD FOR ANY MAJOR ECONOMY – EVEN IN THE GREAT DEPRESSION. December industrial production came in down 9.6%, worse than the METI forecast. It is now down almost 21% year over year. METI forecasts a further 4.7% decline in February. The inventory to production ratio soared again. Maybe METI will be correct.

If it is, Japan industrial production will have fallen 28% (non annualized) in four months. It will have fallen by a third in about a year. Nothing in the history of major nations compares. A 28% decline in four months would be more than half of the entire decline in U.S. industrial production over the 3 years and nine months of the U.S. Great Depression.

It would be a greater decline in four months than in any 12 month period in the Great Depression in the U.S. We are literally looking at the unimaginable. (I am attaching the U.S. industrial production index from the Great Depression for comparison).


And who's compounding this mess, essentially guaranteeing that there's no saving the Japanese economy? Financial markets. They haven't learned a damned thing from the death spiral on Wall Street. Markets, according to Veneroso, are making Japan's injuries fatal by pushing the yen as a "safe haven" for investment as it teeters on the brink of disaster. In other words, investors are pushing the price of a yen higher and higher with nothing supporting it from behind. Sounds disgustingly like the real estate bubble, doesn't it? And yet it's happening. Again.

More from Veneroso:

The yen is strengthening massively against currencies all over. On a trade weighted basis, it is by far the strongest currency on the planet. There are long lags between changes in currencies, exchange rates and trade. The recent take off in the yen is not yet fully reflected in Japanese exports. The lags are too long. The weakness we are seeing in Japanese exports today is in large part derived from aggregate demand weakness from its trading partners. It is the result of an earlier appreciation in the yen for perhaps 120 yen to the dollar to 110 to the dollar or 100 to the dollar. And perhaps, most importantly, it is the result of a secular trend in which its lower wage neighbors in Asia are making inroads – big inroads – into the global markets which it has traditionally dominated as an exporter.

When the long lags between the yen exchange rate change and trade and industrial production fully run their course the land of the rising sun may fall off the face of the earth. And with it will fall all the market participants who refuse to look at fundamentals and chase chart witchcraft and ephemeral market dynamics who have been the big bulls engineering that yen exchange rate that will maximally undermine the markets, economy, and social fabric of Japan.

Thanks to

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