Tuesday 22 March 2011

Disaster currency

Matt at TVHE asks what's going on with the NZ dollar relative to the Yen; the Yen appreciated substantially post earthquake.

I'm no macro money guy, but here's my first cut.

Japanese insurers had to sell off foreign investments and buy yen to pay out on claims. The subsequent rise in the yen reflected demand, and the subsequent fall in the yen was due to intervention by the other majors. The Bank of Japan couldn't cut interest rates to offset the effects of the surge in demand.

You might think this would be a good reason for the NZ Earthquake Commission to continue holding NZ rather than foreign assets, or at least a mitigating reason against my suggestion that they hold a heavily foreign-weighted portfolio.

Do recall though that Japan has for some time been close to zero bound on interest rates. Sure, monetary expansion remains possible by printing money. I'm definitely not a macro guy, and there's no way I'm wading into the fights about liquidity traps: not my comparative advantage and not worth my investment. But it's harder for the Bank of Japan to sterilize the currency effects of insurers' portfolio adjustments than it would be for RBNZ.


  1. Jim O'Neil of Goldman Sachs was on Bloomberg saying that they contacted large Japanese insurers and companies to see if they were liquidating assets and their info was they hadn't, implying it is a speculative flow causing this. Which wouldn't surprise me given the cost of money is so cheap.

  2. Miguel Sanchez over at TVHE thinks that it's the sudden curtailment of currency outflows from Japanese savers. Not implausible. He claims that his old computer stopped him from commenting here.

  3. I don't understand the economics Eric.
    you say that because Japan is reduced obviously in value by its earthquake and nuclear stupidity
    that its currency is in demand.

  4. I would see the appreciation of the yen as a combination of three factors:

    1. Insurers etc. repatriating funds backs to Japan. I'm not sure how much of this has happened already, but will have to come eventually.

    2. Speculators expecting the yen to appreciate with the insurers repatriating funds, looking to make a quick buck.

    3. Cautious Japanese investors bringing their money back to the country as they are concerned about possibly needing it in the near future.

    Also, I would say the more medium term pressure would be on the yen to depreciate, especially with the Japanese government's current fiscal debt situation (185% of GDP).

  5. Interesting interview on Japanese financial dynamics.


  6. Eric, it's an issue with my work computer - either an outdated browser or an overzealous firewall, either way I'm not sure you can do anything about it from your end.

    What I should add to my other post is that I don't really have any proof for my assertion that the yen has a natural tendency to rise. Given that Japan has had persistently lower inflation than the western world over the last two decades, purchasing power parity would argue for a rising yen. But then no other currency follows PPP that obediently, so I don't know why the yen would be the exception.