Japan faces a trade deficit that may become structural

Outlook:

We are always vulnerable to unhappy surprises from China, which is exactly what happened today. The dollar doesn’t get any credit for good US data when dollar-buying is of the safe-haven variety. And poor Japan! Just one day after the BoJ courageously increased QE, despite decades of failed initiatives, the yen refused to cooperate. Now Japan faces a trade deficit that may become structural but a currency that won’t fall as economic theory says it should. This is the worst of all possible scenarios for Japan. Life ain’t fair.

 Just how strong is the housing recovery as an engine of growth in the US going forward? Not much, really. Housing cannot recover unless and until employment improves and unless and until lenders open their wallets a bit wider. A key variable is how much have household balance sheets really improved? The Fed’s estimate of the financial obligations ratio (FOR), which includes mortgage or rent plus other consumer debt as a percentage of disposable income, was 11.13 in Q1 1980 and 10.98 in Q1 this year. It was 14.08 in Q3 2007, so that’s an improvement. This is hardly the only measure of financial capability but it’s not chicken feed. We agree that housing will not be the powerful force it was in the 1990’s or 2000’s, but it’s not a drag anymore, either. As we face a fiscal cliff that will subtract 0.5% from GDP next year unless fixed, it’s a ray of light.

This may suggest the dollar has some wind at its back, although we must worry that happiness over QE3 could fade all too fast. Bottom line, we are getting a normal FX market corrective pullback of unknown duration and extent. If you are a dollar bulls, bask in it—it is unlikely to last, or to turn into an outright reversal.


Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

RELATED TOPICS