The long-term track record of competitive currency devaluation and export-led growth has not been a happy one wherever it has been tried. Unfortunately for Japan and the other major East Asian economies of China, South Korea, and Taiwan, this region appears wedded culturally to the mercantilist model.
As Japan emerges slowly from the deflationary recession cycle it has faced since 1990 and grapples with what is thought to be the oldest society in human history, we can expect them to hew to their export-led model. Consumption in an aged society with government debt in excess of 130 percent of GDP is not the way to grow, so they probably have no choice but to maintain export growth. This means protecting their markets from Chinese and other competition.
As much as Japan might like to end the easy money era, they have not availed themselves the opportunity to do so. The yen carry trade is likely to persist as a form of vendor financing, one that has yet to weaken the JPY. We can expect the JPY to continue its unique path of slow declines and violent rallies as these policies remain in place.
On a chart the JPY will continue to look like no other currency and will insert significant volatility into the DXY. And Japan will continue to be the currency nail everyone else tries to hammer down.
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