Quake unleashes conflicting forces on global economy: Gottliebsen

The Japanese crisis has unleashed a series of conflicting forces on the global economy but for the moment I have my eye on one indicator – the Japanese yen.

The yen is rising against the US dollar because Japanese institutions, led by insurance companies, believe they are going to need vast sums back home and are pulling money out of the US.

The repercussions of this are muffled because of a secondary reaction. Whenever there is global turmoil, money from around the world comes rushing back to the global trading currency and the so-called ‘safe haven’— the US dollar.

These two forces provide confusing trends in the short-term and this is partly reflected in the gyrations on Wall Street as shares slump and then recover.

But behind these swings is an important long-term development. Japan will almost certainly need to sell many of its US securities and if it is smart it will bring the money back home when there is a rush of money coming into the US because of the crisis.

The rise in the yen indicates that’s exactly what is happening.

If you are a major Japan insurer you are facing claims of unprecedented proportions – I won’t bother to try and put a number of it – and the value of your holdings of Japanese shares has been decimated.

You must pull money out of the US, although you know that if you do the yen will rise and make Japan’s exports much less competitive. More importantly you will suffer currency losses. But Japanese insurers and institutions have no choice.

Longer term that will mean higher American interest rates because Japan was the second largest provider of low cost money to the US. China, the largest provider, is already trying to reduce the level of money it sends to the US.

Just how these forces will play out will govern the level of global prosperity going forward. Just as Japan is desperately trying to contain the impact of the problems in its nuclear plants, so central banks around the world are going to try to contain the impact of this new situation in global capital markets.

The good news is that the Middle Eastern pressure on oil prices seems to be subsiding and the Europeans have papered over the latest bank crisis, so we have bought some more time. And for Australia demand for coal is not going to be reduced any time soon and demand for LNG is going to rise.

There is a reasonable chance that we will be able to get through this crisis without the sorts of aftershocks that would compound what is a serious Japanese financial problem. But each day the yen rises is a reminder of the turmoil behind the scenes.

This article first appeared on Business Spectator.