Somebody Noticed the Yen and Yuan

ZH: Yen At Risk Of "Explosive" Downward Spiral With Kuroda Trapped... And Why China May Soon Devalue

The yen's recent nosedive has heightened fears of a vicious cycle as Japan's worsening current-account balance threatens to spur more selling while the BOJ's dovish scramble to prevent rates from blowing out means that even modest countertrend buying will promptly reverse.

While a soft yen has long been seen as a boon to Japan's economy, not to mention the stock market, and was one of the key drivers behind the launch of Abenomics whose anchor pillar was printing ginormous amounts of yen (and monetizing just as massive amounts of JGBs to monetize Japan's prodigious deficit), now that benefits have tilted toward certain exporters and the wealthy while individuals and small businesses feel the pain of higher commodity prices, Japan may need to rethink a fundamental assumption of its economic approach.

As argued here, inflation is a yen killer. If yen tanks, then what do Korea, China and Europe do? All of them are also energy importers, plus food for Japan and Korea.

But while Japan may be a lost cause, a bigger question emerges: how will Japan's latest devaluation impact its fellow exporting powerhouse competitors, i.e., China, and as Edwards frames it, "this beggars the question how will China react? Maybe just like they did in August 2015 when the PBoC devalued? Back then persistent yen weakness had dragged down other competing regional currencies and left the renminbi overvalued."

Wait, yen weakness leading to China devaluation? According to Edwards, that indeed was the sequnece: as he shows in the chart below, the super weak yen of 2013-15, by driving down other competing Asian currencies, ultimately led us to the August 2015 renminbi devaluation.

Yen and yuan both strengthened as soon as the yen made it into headlines and financial media attention, but barring a major reversal in King Dollar, this will only be a consolidation. More over, both currencies are at major turning points. USDJPY's next up move will clear a 20-year base and USDCNY sits right below a decade-plus support line. Since China has said it won't follow Japan in the 1980s, then it isn't going to let its currency appreciate...even if that was in the cards.

I've argued for years that the yuan can experience a major devaluation. Nothing in the fundamental economic argument has changed. If anything, Europe's reaction to Russia's invasion of Ukraine has made the euro far weaker than it was. I had previously expected the yen and euro could absorb some currency flight from a yuan devaluation, but now it looks like the dollar may rise alone in a scenario where nearly all fiat currencies collapse.