“One, two, three, four, I declare a currency war!”

War Games
By Grant Williams
January 29, 2013



The Asian currency crisis of 1997 contained the seeds of an East vs. West currency conflict, but catastrophe was averted, despite the damage that was done to the US deficit and the seeds that were sown for a decade-long war of words between the US and China — all of which brings us right back to today and the currency war that is just getting going.

Whenever such things are talked about, it is invariably in the context of the US dollar; but the trade war I want to take a look at specifically is the one brewing in my part of the world, between two powerhouses who bear considerable enmity towards one another. No, not China and Japan (that has the makings of a war of an altogether different kind), but Korea and Japan.


The rather unfortunate-looking vehicle (left) is the Sibal — the first car ever produced in South Korea. It was developed by the Choi brothers in 1955 and was based (as you can clearly see) on the chassis of the Willy’s Jeeps left behind by departing US troops — only about 50% of its parts were locally produced.

This put the Korean automobile industry about 40 years behind that of Japan, whose storied zaibatsu (conglomerates) began building in the 1910s the cars that would eventually come to dominate the world.

The other area where Japan had it over Korea was consumer electronics.

Back in the 1980s and into the 1990s, companies such as Sony, Pioneer, Hitachi, and Sharp were producing consumer electronics widely recognized as the best in the world; and alongside the likes of Toyota, Nissan, and Honda they helped Japan Inc. stand astride the world.


Back then, Korean cars and consumer electronics were, frankly, a bit of a joke.

Nobody who could afford not to would buy a Daewoo or a Hyundai car. Nobody wanted an LG television. In fact, in 1981 Samsung Electric (the forerunner to Samsung Electronics) proudly boasted that it had manufactured its 10 millionth black & white TV.

Fast forward to 2012, and the change in the landscape has been nothing short of seismic.

Sharp sits on the verge of bankruptcy, once-mighty Sony has seen its share price plummet and is now the subject of speculation as to who may buy it and Hitachi is known more for computer disk drives than consumer electronics. Meanwhile, Samsung Electronics is the only company in the world giving Apple a run for its money.

Samsung surpassed Sony in 2005 to become the world’s 20th-largest brand, and by 2012 it had not only become the world’s largest-selling mobile phone company (some feat in today’s Apple-dominated world) but had spent a brief period in 2007 as the world’s largest technology company, when it leapfrogged the then-incumbent, Hewlett-Packard.

How did all this come about? Simple:


Source: Bloomberg

As the yen strengthened due to its anchor role in the carry trade, the won weakened substantially, making Korean products far cheaper than those of their Japanese counterparts. Simultaneously, the quality of Korean cars and consumer electronics was improving dramatically, enabling Korean consumer electronics to sweep past those of Japan and their car industry to reach heights never dreamed of when the Choi brothers cobbled together the Sibal, as a look at the best-selling cars of 2012 demonstrates:

✔1. Toyota Corolla (Japan)

✔2. Hyundai Elantra (Korea)

✔5. Kia Rio (Korea)

✔8. Toyota Camry (Japan)

Having been gifted a huge headstart by Japan, South Korea is not about to allow the Japanese to claw that advantage back by standing still and letting them weaken the yen, as was made apparent by comments from South Korea’s finance minister, Kim Choong-soo, in Davos this past week:

(CNBC): Basically, the level of foreign exchange has to be determined by market fundamentals in the medium to long-run. But in the short run, we all know that there are times where noises can matter, disturbances can take effect. But that’s only for the short-term period,” Kim told CNBC on the sidelines of the WEF in Davos.

“We all know the grave consequences of competitive devaluation efforts, which we experienced some decades ago. So I think it’s time to sit together to talk about that. We live in a global economy, so you yourself cannot do something alone,” Kim said. “You have to cooperate with your partners.”…

Asked whether South Korea would be forced to respond to the Bank of Japan by managing the won in a more meaningful way for the country’s manufacturers, Kim said: “It all depends upon how markets respond to such moves, and the markets have changed over time… our central bank will do whatever it’s supposed to do to protect the high volatilities in the financial sector.”

“And I’m particularly concerned about the volatilities. If changes are made too rapidly, we all know that will create uncertainties, and we have to do something to prevent that from happening,” Kim added.


Source: Bloomberg

Japan’s currency has been strengthening for two decades, while its competitors have been happy to sit back and let the weakening effects of that move on their own currencies continue. Now Japan has decided it needs a weaker yen, and though the move has thus far been fairly powerful, we have reached the point where the likes of Korea will step in and defend the advantage they have gained over the last twenty years. As can clearly be seen from the graph (previous page), Korea’s KOSPI Index has decoupled from the Nikkei as the yen slide has picked up speed, and that is a phenomenon South Korea simply cannot allow to continue.

This is how it starts with Currency Wars.

When it comes to ammunition reserves, Japan’s balance sheet dwarfs that of Korea, with almost four times the amount of foreign currency at their disposal; but they will be fighting this currency war on multiple fronts, and those reserves can quickly become exhausted.


Source: IMF

Printing money or devaluing your currency in a vacuum is one thing. Generally, you can make a difference up to the point where those against whom you are attempting to weaken push back (ask the Swiss National Bank); but once it becomes a competitive sport, all bets are off.

This past week, Japan announced that, as of January 2014, it will begin an open-ended, unlimited QE program to monetize Japanese debt (they are currently buying 36 trillion yen a month, or about $410 billion) and attempt to generate the magical 2% inflation that will decimate its bond market solve all its problems. Sadly, this does no more than allow Japan to catch up with other central bankers around the world who are already monetizing like crazy; but, purely on the basis that something is better than nothing, this change in policy has been cheered to the echo.

As we head into 2013, we find ourselves in a situation unlike any that has ever occurred in the history of global finance. The ability to simplify the complexity of that situation is something only the very brightest amongst us are able to do, and one such man is Raoul Pal of the Global Macro Investor (with whom I have recently been fortunate enough to have a fascinating dialogue). Raoul put together a very simple list which, at the time he compiled it in late December, beautifully highlighted the utter absurdity of today’s central banking folly.

The list was split into sections that grouped the 38 countries that had negative or zero real rates (yes: THIRTY. EIGHT.), as well as the countries that either had explicit QE programs in place or were actively intervening in or verbally manipulating their currencies:


Source: Raoul Pal, Global Macro Investor


Now, does it seem remotely possible that all these countries can have weak currencies at the same time? Of course it isn’t possible. Not without rampant inflation, it isn’t. But that doesn’t appear to be a problem for the central bankers of the modern world, who are confident that inflation is ‘contained’. Yes, ‘contained’. Is anyone paying attention, I wonder?

The competitive devaluation merry-go-round will continue, because these buffoons have left themselves no other options. A currency war will break out in earnest; because none of them will be able to generate the weaker currency they need, and that will in turn lead to several exits from the EU, because the weaker economies will need to regain control of their own currencies and not be beholden to Brussels. This is the way things go, I am afraid.

“One, two, three, four, I declare a currency war!”




Continues here War Games

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