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mdman

The Japanese Revolution

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From the Times

To the alarm of some US commentators, Mr Hatoyama has taken an outspoken stand against unfettered international capitalism, and promised to abandon the country’s “worship†of the United States and break away from decades of unquestioning support for American foreign policy.

“Japan now needs to make a clear shift from diplomacy that follows the US lead to diplomacy based on multilateral co-operation,†he said earlier this year. “We must view the Asia-Pacific region, where we have increasingly close ties with other countries, as the place where Japan will live as a nation.â€

It will be interesting to see what the DPJ actually do. If they follow through on their rhetoric, they will only buy yen-denominated UST (samurai bonds). Also, the rhetoric about Asia-Pacific co-operation may result in some sort of yen/yuan trade currency. If either or both of these happen, the dollar will soon be toast.

Denninger wrote about this back in May, explaining the risk of selling bonds denominated in another country's currency:

See, in order to have a hyper-inflationary collapse of an economy, such as Weimar Germany, you must have debt denominated in some currency other than your own. Iceland, for example, blew up in no small part due to a decent amount of their debt being denominated in other than their native currency. Borrowers in Eastern Europe have discovered recently the danger of home mortgages written in Swiss Francs.

Such foreign-denominated debt seems to foreign borrowers to be "more fair" in that it places the risk of currency devaluation on the nation that undergoes it. But what is often missed is that currencies don't always change value due to the actions of just one nation - that is, Japan's Yen could strengthen due to the actions of Japan, just as the the dollar could weaken due to the actions of The United States.

The insidious (and dangerous) reality of such a circumstance is that it creates a perverse incentive for the nation buying the debt denominated in its own currency to take actions that strengthen their currency, because doing so increases the value of the note they hold! That is, they can increase your indebtedness by practicing fiscal restraint in their nation.

I wonder if there'll be much 'action' in the currency markets tonight

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promised to abandon the country’s “worship†of the United States and break away from decades of unquestioning support for American foreign policy.

But.....they lost the war.

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