Yen. Image Source: Pixabay

The debate over the future of Japan continues. This is a complicated and interesting issue. Because of its small footprint, we often forget the oversized role Japan plays in the global economy. Japan is the fourth largest economy in the world and a major exporter of finished goods. This makes it a big player in the global markets and for many years some investors have considered the yen a safe harbor in times of turmoil. 

In a post last Sunday here at AdvancingTime it was pointed out that the effects of higher rates will not end until they do. It could be argued that Powell has gotten a large part of his job done if he can simply hold the course. This means staying high for longer. This has the power to end the era of zero and negative interest rates across the world. The implications of ending this forty-plus-year trend are enormous. 

While I appreciate the opinions of Tom Luongo, I strongly disagree with him on the future of Japan. This is not personal, he does not know me, and we have never met. It should be noted that we both agree on the idea the euro is toast, he even talks about how much he expects it to fall. About 32 minutes into a video Luongo makes his take on Japan and the yen perfectly clear. 

Another issue is just how fast a fall in the yen or any currency could unfold. Today with all the ways to convert wealth to another currency or move it out of a country it could happen very very fast. If and when a currency falls out of favor and wealth is shifted across borders it seldom returns. When faith in a fiat currency is lost it is difficult to regain premier status.

One of the reasons I disagree with Luongo's stand on the yen is because it is possible to short the yen while at the same time buying Japan's stock market. The moderator goes on to say this. You can be bullish on the Japanese stock market while at the same time be bearish on Japan's currency. Stock markets can rise as a result of inflation and a falling currency is good for exports. The problem of course is that if the yen falls faster than the stock market sector you invest in rises, you lose.

Below are seven key reasons the yen is about to fall.

• Japan faces more inflation ahead and wealth has been exiting the country for years
• Japan imports a lot and the cost of them is soaring
• China's slowdown has hurt Japan's economy
• Japan has too much debt
• Japan has horrible demographics
• The BoJ owns much of the stock market through ETFs selling them would affect its market
• History shows that when under attack, a country cannot save both its bond market and currency

The idea that when investors in Japan's government bonds begin to believe inflation is not going away it would be logical for owners of JGBs to move out of low-yielding securities and buy foreign bonds or equities. The moment the Japanese stock market fails to rise enough to offset a falling yen and inflation this will turn into a tsunami of money fleeing Japan and constitute the end of the line for those left holding both JGBs and the yen.

Around 39 minutes into the video Luongo sort of concedes the yen could swing into problems. Of course, this is my interpretation of his words. Going into 1 hour and 28 minutes Luongo mentions that when currencies slip, they often drop fast. Only time will tell how this unfolds. Still, until we see some clarity as to how Japan will deal with its debt problem, expect the debate over the future of Japan and its currency to garner attention.   

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