The BOJ and Japanese government have since July been making it crystal clear in language as well as action that the preferred direction of the yen versus the major currencies is lower. To our minds this represents fairly overt merchantilist behavior as Japan attempts to steal export share from its main competitors in order to boost or keep positive its current account surplus. As we learned in the 1930s, beggar thy neighbor policies bring with them significant deflationary headwinds as effective price cuts brought on by currency devaluation permeate through the system and induce still further price cuts by competitors.
In a graphical manner we can show the effects of large currency swings on PPI by comparing the year over year change of the two series. In the four charts below we do exactly that as we show the year over year change in PPIs of China, the US, Germany and South Korea overlaid on the relevant yen exchange rate. We show significant positive correlations between the yen and producer prices (i.e. as the yen weakens PPIs usually fall with a lag). Thus, as Japan initiates the second movement of its competitive devaluation our antennae piqued for further deflationary pressure on producer prices around the world.
