Wednesday, April 8, 2009

New Data From Japan: Who Will Buy U.S. Debt?

The current account is the sum of the balance of payments, financing activity and financial transfers for a nation. For a nation like Japan:

- Exporting nation, balance of payments positive

- Net creditor, financing positive

- Established nation, transfers negative

Net, Japan typically reports a monthly positive current account. That means that they have to figure out what to do with the foreign currencies they receive. The U.S. has been a major importer of Japanese goods, so they usually have a large supply of USD on hand. If Japan always sells those USD and buys JPY, they would erode their competitive advantage. They want a cheap JPY, so they keep the funds in USD and buy U.S. Treasuries.

This has provided the U.S. with a stable demand for debt. There are two major problems though: Economic slowdown and the emergence of China.

China has now eclipsed the U.S. as Japan's top trading partner. It is a sign that our political clout will wane and shows how much we are falling on a relative trade basis. Our nation is in a DEPRESSION and China is growing (albeit at a slower rate than the last five years).

The U.S. imports from China, meaning that they have a large supply if USD as well. However, our economy is slowing so much, that the growth rate of their USD position is falling as well.

U.S. Treasuries have been in the news because of the large supply being issued to fund all of the new government initiatives. Some say you should sell Treasuries because inflation is just around the corner. In theory, I agree. The timing is uncertain though. What I do know is that funds available to buy these bonds are drying up and the perception around the world about the soundness of our economy is changing. Get ready to short Treasuries because of that.

China Becomes Japan's Largest Trading Partner

Japan Exports Fall to Record Low

Export Slump Hits Japan's Current Account

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