Could the Yen Trigger Another Asian Financial Crisis?

That’s the provocative thinking from SocGen’s Albert Edwards who writes:

  • We have just returned from a marketing trip to Hong Kong and Singapore and had some very fruitful conversations with clients. Much of the discussion centred on the likelihood that the Bank of Japan (BoJ) would lose control of the printing press and how a rapidly declining yen would lead to a replay of the 1997 Asian currency debacle. It seems investors may have forgotten that yen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia’s subsequent economic collapse. We discussed how that scenario might mirror what is happening today.
  • We have noted previously that China has seen a pronounced rise in its real exchange rate in recent years – mirroring events in Thailand, Malaysia and South Korea in the run-up to the 1997 crisis (and indeed the GIPS prior to the eurozone crisis). In addition, China, and many other key EMs have seen a trend deterioration in their balance of payments (BoP), partly as a result of the repatriation of foreign direct investment – again echoes of 1997. Hence despite a $128bn rise in China’s first quarter foreign exchange reserves to a record $3.44 trillion, we note the yoy growth rate is still only a paltry 4% (see chart below). And although 4% is an improvement on recent data, it is a far cry from the rapid growth rates of recent years and represents a huge monetary tightening that may help explain recent poor Chinese data.

I don’t know how valid these thoughts are.  I’ll be reading this and this as a starting point and report back to you when I’ve come to my own conclusions.   If you have thoughts on the potential instability caused by the sudden plunge in the Yen’s exchange rate I’d be curious to hear them.



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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • jmf1928

    You should check out the GaveKal conference call today for their Knowledge Leaders fund. Should be something they touch in in some detail.

  • jmf1928

    Actually its more along the lines of triggering a deflationary wave in the rest of the world. Should have read the full post before I commented.

  • Mountaineer

    You should seriously consider adding this to the reading list as well.

  • LVG

    Yeah, the Asian financial crisis was a classic boom/bust phase that started with a speculative bubble in many countries and ended up looking like a foreign exchange driven crisis.

  • bart

    Causes of the 1997 Asian Financial Crisis: What can an early warning system model tell us?

    And my own translation into charts:

  • Erik V

    The currency crisis was mostly a matter of central banks pegging exchange rates and trying to hold their pegs no matter how much the economic fundamentals argued for a revaluation upward. Now most Asian countries have floating FX rates, but China could certainly be forced to make a bigger upward adjustment if inflation really gets out of hand there.

  • Alberto

    I’m not an expert so you can trash my comment by should not be a mistery that there is a significant over capacity in many industrial sectors. Surely all Asian countries have now deeper pockets but are still over dependent to an export driven model that drives over investments. I’m pretty sure that the problem of bad loans are a worldwide one and not confined to the western banking system. I’m also pretty sure that most of the statistical data coming from those countries are not as reliable as the data coming from US or Germany. It’s seems to me that the deflationary forces around the globe are going to have an impact in Asia too. Decoupling is a fantasy and the fact the asian banking system is strong is a myth.

  • Martin

    Maybe Gold is the first little dead fish showing up and a bigger whale will show up and that Gold is indeed the boogeyman in this deflationary environment.

    I think you should be worried that something not great is unfolding in Asia, probably the reason why the US is so nervous about Abenomics.

    I still think the on-going crisis and path, is similar to a particular type of “rogue waves” called “three sisters” (“three sisters” rogue waves sank SS Edmund Fitzgerald – Big Fitz) namely:

    Wave number 1 – Financial crisis

    Wave number 2 – Sovereign crisis

    Wave number 3 – Currency crisis

    Couple of random thoughts that keep me awake at night about the current environment:

    Is China at risk of social unrest due to labour conditions and weaker inventories signalling a much weaker economic outlook than expected?

    Are we in the eye of the storm in Europe with Italy without any government, and Portugal taking a stand against the Toika’s diktats?

    Is the Middle-East sinking more into turmoil with Egypt sinking into chaos and anarchy with FX reserves running out with Qatar throwing the towel and not providing so far additional rescue funding?

    US: no real rebound in employment, low saving rate, weak housing still, velocity not improving with M2 in the doldrums.

    Japan playing “beggar thy neighbor” risking blowing up stirring trouble in the entire Asian region which is already hurting badly South-Korea.with companies like Bridgestone and Sumitomo Rubber being the biggest winner so far of the weaker yen? China accounts by the way 34% of global demand for rubber and inventories have climbed to 117,696 tons according to the Shanghai Futures Exchange, the highest in more than three years.

    So what if the trigger will be in Asia like in 1997 (as suggested by Albert Edwards today from Societe Generale) and not Europe after all?

  • Matt McOsker

    This was my thought. Pegged currencies have this problem, but floating not sure that is as common.

  • Matt McOsker

    Should qualify this. It may be a problem for other pegged currencies, but Japan should not experience problems itself.

  • Mark Caplan

    The 1998 Asian financial crisis is usually attributed to foreign investors who panicked and yanked their hot money investments in a selling stampede. The Asian “Tigers” lacked sufficient foreign currency reserves to defend their currencies, which consequently collapsed. This is why many emerging market countries today maintain enormous foreign currency reserves.

  • baburu

    The thing with Mr Edward, whom I’ ve had the pleasure of dealing with while at Socgen, is that he always makes bold calls…almost as he was seeking the attention (he predicted the SP would trade at 500 by the end of 2012)
    But this might not be the point of this post…

  • S-I

    Isn’t he predicating his thinking on “printing presses” and QE = money printing = devaluation of the currency?

    On the other hand as long as a enough market participants believe this shit it will become self fulfilling.

  • Tom Brown

    Isn’t QE in Japan a little different? They aren’t just investing in risk free gov bonds… aren’t they (BOJ) buying a broad asset class?

  • Stephen

    “Isn’t he predicating his thinking ”
    I remain mystified why this chap get’s so much media space .Perhaps it works on the same basis as the performing chimpanzee model where the crowd line up to watch something bizarrely entertaining. I think the quoted sentence is error strewn ,becuase from what I have see to date he has all the deductive reasoning ability of a table leg.

  • Alberto

    In Italy the situation is spiralling out of control, liquid fuel consumptions are back to 1998 levels and sinking… the last organized political party (democratic party) is imploding in many smaller parties, anarchy is coming out, or something is fixed within 3 months or it will be too late. So… Japan has the 2rd largest debt, Italy the 3rd… you are right about the exploding middle east but I’d like to remember that Pakistan is a black hole with 100 nukes… for stock investors all is fine… exactly like the goldbugs up to a few days ago… make your bets…

    My position is not irrational, that of the “all is fine” is totally crazy. Stock plots, supports, resistance levels doesn’t mean anything in an overleveraged financial world with fat tails as big as ever !

  • Mr. Market

    O.M.G. ! Another nutcase who doesn’t understand the difference between “Monetizing Debt” and (literally) “Printing money” (banknotes). As far as I know the BoJ is only “monetizing debt” and that’s EXTREMELY deflationary.

    The asian crisis was the result of something different. From about 1984 up to 1995 the USD/DEM (DEM=German mark) fell. Asian countries were focussed on exporting to the US and maintained a peg with the USD. Since the USD fell against the DEM, the asian countries saw their profit margins rise from their exports to Europe (+ Germany).

    But the financial equation changed from 1995 up to 2001 when the USD rose against the DEM. It effectively wiped out asian export revenues of exporting to Europe.

    Remember this video with Hugh Hendry ?

    Hugh Hendry expects/thinks that the USD/Yen rate could go up to the high 50s/low 60s. IF/When that happens then that WILL be the REAL asian crisis. That WILL lead to a giant asia crisis.

    Japan will – IMO – lead to a new financial crisis in the ….. US. The current account surplus in Japan has turned into a Deficit. And that will make it much harder for the US to finance its deficits.

  • jt26

    I remember the Asian Tiger bubble in the 90s. I think peaked in 94, and then Mexico’s crisis occured and markets slowly loss confidence. Looking at Asian markets only China has the bubble collapse pattern. Korea at least added lots of regulation after 98 to limit foreign lending, and of course they (like many other Asian countries) have built huge foreign currency reserves as a reaction to 98. If there is a risk, a China collapse and devaluation could be even more serious than a Japanese one; China devalued in the 98 crisis which put the nail in the coffin. Japanese industry is highly integrated with Asian manufacturing so I don’t see how a Yen devaluation would hurt (when was the last time you actually bought a consumer product made in Japan)? Plus, if Asian partners thought there was a real impact, they could easily stop it … remember those foreign currency reserves? China could buy 1:1 every Japanese asset for every Japanese purchase of a foreign asset, and still have money left over to buy Cypress and some Greek islands.

  • Sam A

    Why would there be a sudden collapse in the yen? It is not a widely owned currency by foreign investors, nor are yen denominated assets. If Japanese investors dump their yen denominated holdings, they will logically buy something else, and my guess is they will buy other Asian assets, which will bolster their currencies and markets.

    I think the way to play the yen devaluation is to buy Southeast Asia, where Japanese have a history of FDI and are predisposed to invest.

  • Happy Dog

    Balance of payments and capital flows are one of the tougher macro subjects to understand and fully grasp. Good luck.

  • Up side Down


    You are spot on I reckon – seeing it as global and interlinked but the big challenge is “when”?

    patience is required as the scenario unfolds. Cracks are being papered over for now but as they grow too big, one day someone will fall in.

    your guess is as good as mine which particular crack it will be and when. Capital preservation for now should be the only objective.