When global capital markets prevent balancing
Well, this ought to help the $80bn goods trade deficit the US is going to rack up with Japan this year.
The amazing shrinking yen continued its slide this week, crashing to a seven-year low point against the euro, sterling, Australian dollar and South Korean won and to a 30-month low against the US dollar. . . .Yeah, no kidding.
The chief problem for the yen is that the flattening of the US yield curve has made it uneconomical for Japanese investors to hedge their ongoing purchases of US Treasuries, but a falling yen encourages overseas investors to hedge their purchases of Japanese equities – negating the value of these latter flows in currency terms. . . .
Japanese ministers suggested the government was comfortable with yen weakness.
In 2004 the US ran a $75.6bn goods trade deficit with Japan. That figure will be well over $80bn by the end of 2005. No surprise considering the yen is some 13% weaker in nominal terms now than this time last year (closer to 10% weaker in real terms). So far the US is exporting only 1.3% more goods to Japan this year over last year's pace, while importing 7.0% more.
The US services surplus is indeed growing this year, up a big 18% over 2004. Last year the US ran a $15.6bn services surplus with Japan. 18% larger is less than $3bn more, however, thus still not enough to keep the overall trade balance with Japan from deteriorating.
Global capital markets are determined to prevent any balancing mechanism from operating until it's too late to avoid the hard landing scenario everyone fears. So where are the signs of a new Plaza Accord in the offing? I'm not holding my breath.