Currency wars are driving down the Sensex

Vivek Kaul

The BSE Sensex fell by around 1624.51 points or 5.94% to close at 25,741.56 points yesterday (August 24, 2015). Sensex is an index of 30 major stocks that are traded on the Bombay Stock Exchange.

By now, dear reader, you may have read at many places that this was the biggest fall of the Sensex ever. That is incorrect. It was the 29th biggest fall of the Sensex, if we look at falls in percentage terms, which is the right way of looking at the situation.

Further, it was the biggest fall of the Sensex in more than six and a half years. On January 7, 2009, the Sensex had fallen by 7.25%. That was the day when B Ramalinga Raju of Satyam Computers confessed to a fraud. All falls after January 7, 2009, have been lower than yesterday’s fall.

So the question is why did the Sensex fall as much as it did yesterday?

The simple answer is—currency wars. In October 2012, the 80 Japanese yen were worth a dollar. As I write this on August 24, 2015, around 118 Japanese yen make for a dollar. The Bank of Japan (their equivalent of Reserve Bank of India) has been printing yen in the hope of driving down the value of the yen.

Why has it been doing this?

This is being done to make Japanese exports more competitive. A fall in the value of a currency means exporters can make more money. It also allows them to cut prices and hopefully boost exports and in turn economic growth. At the same time, the idea is to make Japanese imports more expensive.
China competes with Japan when it comes to exports. In July 2015, Chinese exports were down by 8.3%. During the same period Chinese exports to Japan were down by more than 10%.

Between August 11 and August 14, the People’s Bank of China, the Chinese central bank devalued its currency, the yuan, against the dollar. Before August 11, 6.2 yuan were worth a dollar. Now around 6.4 yuan are worth a dollar. This was done in the hope of boosting Chinese exports and in turn Chinese economic growth. The fear is that China will devalue the yuan further.

But why is that driving down the stock market?

If China devalues the yuan further, Chinese exports will become cheaper. This will mean that prices of goods produced in countries like United States and in large parts of Europe will have to be cut, in order to remain competitive with Chinese imports. This will lead to a scenario of what economists call “deflation” or falling prices in these countries. The Western economies will contract or not grow at the same speed. The stock markets around the world are adjusting to this “expected” situation. The Indian market is not an exception to this, as most of the money invested in the Indian stock market belongs to foreign investors.

What should you do?

A lot of experts have said that this is a good time to buy. That may actually not be the case. As I write this, the Dow Jones Industrial Average, one of the premier stock market indices in the United States, is down by more than around 500 points or 3%. Chances are the Sensex’s fall may continue as well. This is a risk not worth taking.

Also, it is worth remembering the old adage of drinking stocks SIP by SIP, where SIP stands for a systematic investment plan. Since the start of January 2008, Sensex has given a return of 5% per year. But an SIP on a good mutual fund would have given you a return of higher than 15% per year. This is timeless advice and works at most points of time.

The column originally appeared in the Bangalore Mirror on August 25, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Get ready for a real mess: A new chapter may be opening in currency wars

3D chrome Dollar symbolVivek Kaul

The Japanese yen recently touched a six year low against the dollar. One dollar is currently worth around 108-110 yen. This many experts believe will lead to the start of a new round of currency wars. As Albert Edwards of Societe Generale writes in a recent research note dated September 22, 2014 “
the yen has slipped below a key 15-year support level against the dollar…The next phase of global currency wars may have begun.”
The term “currency war” was first used by Guido Mantega, the Brazilian finance minister, in 2010. It refers to a situation where multiple countries start driving down the value of their currencies against the dollar in a bid to drive up exports and inflation.
Before we try and understand Edwards’ statement in detail, it is important to go back a few years.
The Bank of Japan joined the money printing party rather late in the day towards the end of 2012. Before this the balance sheet of the Japanese central bank had expanded only 30% since the start of the financial crisis. Interestingly, in January 2012, the total assets of the Japanese central bank had stood at 128 trillion yen. Since then, it has more than doubled to 275.9 trillion yen at the end of August 2014.
The Bank of Japan plans to inject $1.4 trillion into the Japanese financial system by April 2015 by buying Japanese government bonds every month. This is pretty big, given that the size of the Japanese economy is around $5 trillion. Currently, it is printing 5 trillion yen every month and pumping that into the financial system by buying bonds. That explains why the total assets held by the bank have more than doubled.
The Bank of Japan entered the money printing party only after Shinzo Abe was elected as the prime minister on December 26, 2012. Abe promised to end Japan’s more than two decades old recession through some old fashioned economics, which has since been termed as Abenomics.
Abenomics is nothing but money printing in the hope of driving down the value of the yen against the dollar in the hope of increasing exports and also creating some inflation.
As James Rickards writes in
The Death of Money “Japan…had another reason to support the money printing…Money printing was being done not only to promote exports but to increase import prices. These more expensive imports would cause inflation to offset deflation…In Japan’s case, inflation would primarily come through higher prices of energy exports.”
he Bank of Japan decided to get in bed with the government on this and is targeting an inflation of 2 percent. It wants to reach the goal at the earliest possible date. And how does that help? In December 2012, Japan had an inflation rate of –0.1 percent. For 2012, on the whole, inflation was at 0 percent, which meant that prices did not rise at all. In fact, for each of the years in the period 2009-2011, prices had fallen in Japan.
When prices are flat, or are falling, or are expected to fall, consumers generally tend to postpone consumption (i.e., buying goods and services) in the hope that they will get a better deal in the future. This impacts businesses, as their earnings either remain flat or fall. This slows down economic growth.
On the other hand, if people see prices going up or expect prices to go up, they generally tend to start purchasing things. So a moderate inflation helps businesses as well as the overall economy. Hence, by trying to create some inflation the idea is to get consumption going again in Japan and help it come out of a more than two decades old recession.
The money printing has helped create some inflation in Japan. In July 2014, the consumer price inflation in Japan stood at 1.3%. One reason for this rise has been the fall in the value of yen against the dollar. In early November 2012, one dollar was worth 79.4 yen. Currently, one dollar is worth 108-110 yen, as mentioned earlier. This has made imports expensive and pushed up inflation. As John Lanchester writes in his new book
How To Speak Money “The yen has dropped, which is a good thing for Japanese industry, and inflation is showing signs of returning, which is also a good thing, though some commentators are worried that the process could quickly go out of hand.”
The question here is how can the process quickly go out of hand? Allow me to explain. The
inflation hasn’t led to people spending more money. In fact, the gross domestic product (GDP) of Japan contracted at an annualized rate of 6.8% during the three month period of April to June 2014. It was also expected that a falling yen will boost Japanese exports. But that doesn’t seem to have happened either. Exports have fallen in three out of the last four months. In August 2014, exports fell by 1.3%, in comparison to the same period last year.
Interestingly, one of the key learnings in the aftermath of the financial crisis has been that if a policy does not work for a central bank, it is likely to try more of it. Given this, it is expected that the Bank of Japan will print more money in the hope of inflation reaching the targeted 2% and to get exports going as well.
Diana Choyleva, head of macroeconomic research at Lombard Street Research, writes in a research note that the Bank of Japan “is also likely to redouble its QE [quantitative easing] efforts if it is to achieve its 2 percent inflation target.”
This will lead to further depreciation of the yen against the value. As Edwards of Societe Generale puts it “
One of the few things I have learnt over 30 years in this industry is that when traders decide the yen/US$ starts to move it can jump by Y10 or Y20 very, very quickly indeed.”
In this scenario other countries are also likely to print money so that their currencies lose value against the dollar, in order to keep their exports competitive.
The thing to remember here is that money printing in the hope of driving down the value of currency is not something that only Japan can indulge in. Interestingly, this is precisely what had happened when Japan first made its first moves towards printing money in December 2012.
In fact, politicians in South Korea by early February 2013 had started voicing their concerns about the depreciating yen. South Korea and Japan compete in several export-oriented industries, like automobiles and electronics. Korean export companies like Samsung and Hyundai compete with Japanese companies like Sony and Toyota.
At the end of December 2012, one dollar was worth 1,038.1 Korean won. Soon, the Korean won also started depreciating against the dollar, and by late June 2013, one dollar was worth around 1,160 Korean won. The Thai baht started depreciating against the dollar in April 2014. The Malaysian ringitt joined the club from May 2013 onward. By early 2014, China had also entered the currency war by allowing the yuan to depreciate against the dollar.
Nevertheless, the depreciation of this currencies against the dollar did not continue. The South Korean won is back to where it started and currently quotes at around 1063 won to a dollar. But there is nothing that can stop these countries from starting to cheapen their currencies against the dollar, all over again. The currency wars might break out all over again.
The joker in the pack is China. Currently, one dollar is worth around 6.14 Chinese yuan. It is interesting to look at the trajectory of the Chinese yuan over a period of time.
In 2005, one dollar was worth around 8.27 yuan. By 2011, one dollar was worth around 6.82 yuan. The appreciation of the yuan against the dollar continued at a measured pace and by mid-January 2014, one dollar was worth 6.14 yuan. This is when things turned around and the yuan started to depreciate against the dollar, something that had not happened in a very long time. By April 30, 2014, one dollar was worth 6.25 yuan.
Among other things the depreciation of the yuan was also a response to Abenomics which had led to the depreciation of the yen against the dollar. One dollar was worth around 80 yen in November 2012, before Shinzo Abe had taken over as the Prime Minister of Japan. By January 2014, one dollar was worth 105 yen, thus making Japanese exports more competitive in the international market. China’s yuan had to be adjusted to this new reality. As China is trying to move up the value chain, its products are competing more and more with Japanese products in the international market.

Nevertheless, since June 2014, the yuan has been appreciating against the dollar. But if the Japanese keep printing money and driving down the value yen against the dollar, the Chinese are also likely to have to start pushing the yuan down against the dollar.
This would mean Chinese exports more competitive. As the yuan depreciates against the dollar it would allow Chinese exporters to cut prices of their products. Let’s understand this through an example. A Chinese exporters sells a product at $100. He ends up getting paid 614 yuan for it, at the current rate. But if one dollar is worth seven yuan, he would be paid 700 yuan. This situation will allow the Chinese exporter to cut the price of his product. Let’s say he cuts it to $90, even then he ends up earning 630 yuan ($90 x 7), which is more than earlier.
As Choyleva of Lombard Street Research,
writes in a recent research note “If both Japan and the euro area go for extensive QE, emerging markets in Asia would suffer as their currencies appreciate. There would be no way China could restart its sputtering growth engine without major yuan devaluation.”
In order, to stay in competition, prices of products from other countries will have to be cut. And this will end up exporting deflation (a situation where prices are falling) to large parts of the world.
Of course, it is worth remembering here that everybody cannot have the cheapest currency. Once countries start devaluing their currencies, it becomes a race to the bottom and is not good for anyone. In technical terms this is referred to as beggar thy neighbour policy.
As a senior official of the Federal Reserve once remarked:
Devaluing a currency is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess.”

The article originally appeared on on Oct 2, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

High inflation is inevitable, we just don’t know when

InflationVivek Kaul 
There are good times. There are bad times. And there are bad times which don’t seem like bad times, at least to some people. Central bank governors all over the world live in bad times which don’t seem like bad times to them.
In the last few years, central banks of United States, Great Britain, Euro Zone, China, Switzerland and now Japan, have printed tremendous amount of money. “So far, five central banks, – the Federal Reserve, the European Central Bank, Bank of England, the Bank of Japan and the Swiss National Bank have effectively created more than $6-trillion of new currency over the past four years, and have flooded the world money markets with excess liquidity. The size of their balance sheets has now reached a combined $9.5-trillion, compared with $3.5-trillion six years ago,” writes investment newsletter writer Gary Dorsch.
This has been done with the hope that pushing all this new money into the financial system will ensure that interest rates continue to remain low. Low interest rates would make the citizens of their respective countries borrow and spend more more. And at the same time banks and financial institutions would also be happy to lend more, given that there is so much more money going around. This will help businesses and the overall economy.
There was also the hope that all this new money would create some inflation as it chases the same amount of goods and services, leading to a rise in prices. When people see prices rising, or expect prices to rise, they are more likely to buy goods and services, than keep their money in the bank. That was the logic. And when that happened businesses would do well and so would the overall economy. But that hasn’t happened.
So central banks have gone ahead and printed even more in the ‘hope’ that people borrow and spend and some inflation is created. The fact that all this new money floating around hasn’t led to a high inflation has been used as a justification for printing even more money in the hope of creating some inflation. That’s the most harebrained logic that one can ever come across.
The fact that doing something (i.e. money printing) that should have resulted in something else (i.e. some inflation), but is not resulting in that something else (i.e. inflation), is being used to justify doing more of that something (i.e. money printing).
Also central banks, their governors and their respective governments have suggested time and again that all the money printing will lead to only some inflation, which they will be able to manage and not very high inflation that will go beyond their control.
It has also been suggested in recent times that very high inflation scenarios don’t just occur because of excessive money printing but there are other reasons to it as well. One theory which has gained popularity in recent times is that high inflation happens when there are supply shocks.
Lets take the case of German hyperinflation of 1923 where inflation reached a peak of 1000 million % a year and which remains the most discussed case of the twentieth century.
James Montier writing in a research paper titled 
Hyperinflations, Hysteria, and False Memories points out “Germany’s productive capacity had been significantly damaged by World War I, both in terms of the losses inflicted and the resources redirected to military use. Allied troops occupied the Ruhr Valley – the seat of much of Germany’s manufacturing base. These events clearly constituted a large supply shock.”
So basically what Montier suggests is that Germany was not producing enough goods to meet the needs of its citizens. It was also not in a position to import given that it did not have the money (or gold as it was in those days) to pay for the imports. And as there were not enough goods going around that led to high inflation.
Fair point. But this doesn’t necessarily mean that the excessive money printing wasn’t responsible for high prices that prevailed. The price of basic necessities went through the roof. A kilo of butter cost 250 billion marks and a kilo of bacon 180 billion marks.
The German government had been printing an excessive amount of money to finance its expenditure. It did not earn enough revenue to meet its expenditure. In 1922 a trillion marks were printed as the deficit shot through the roof. In the first six months of 1923, nearly 17 trillion marks were printed. With such an astonishing amount of money being printed, money started to lose its value dramatically. By August 1923, one dollar was worth 620,000 marks(the German currency) and by early November was worth 620 billion marks.
As the currency lost value, the government had to keep printing more of it, to meet its expenditure. So the more money the government printed, the more it lost value, and in turn, the government had to print even more money.
The industry which thrived during this period was the money printing industry. Thirty paper mills and 133 printing plants were working, but still could not turn out enough money required to keep up given the huge denominations they had reached.
So yes, a supply shock was responsible for an increase in prices, but so was money printing. And Germany was not the only country that went through this. There were other countries that went through a similar scenario which had supply shocks and printed an excessive amount of money also.
As Forrest Capie writes in a research paper titled 
Conditions in which very rapid inflation has appeared “Austria, Germany, Hungary, and Poland all had substantial and growing deficits built up prior to or coincidental with the inflation.” Austria, Hungary and Poland had peak inflation rates of 4 million %, 14,000% and 23,000%. So a supply shock would have definitely added to inflation but that does not mean that all the new money being printed and put into the financial system had no role in creating inflation.
Lets take the case of China in the late 1930s and 1940s. Japan invaded China in 1937 and occupied around one third of the country which included much of its eastern part. This meant that China no longer had access to taxes from the part under occupation of Japan. Also once this conflict ended, a civil war started in China. Hence, there was a prolonged supply shock. And this Montier argues led to very high inflation. Again this argument just covers one side of the picture.
Inflation in China at its peak crossed 50% per month. As Capie writes “There were clearly a long and accelerating inflation through these years with prices rising first by 27 per cent then 68 per cent, then more than doubling and so on until in 1947 monthly rates in excess of 50 per cent were reached.”
But was it only because of a supply shock? In 1936-37, the Chinese government revenue was equal to its expenditure. The situation changed in the years to come as war expenditure went through the roof. “When the Japanese attacked, the leader of the Nationalist Government pledged total war without regard to cost, and in the next few years no attempt was made to match increased expenditure with increased revenues,” writes Capie. By 1948, the government was spending more than twice of what it was earning. The difference being made up through printing money.
As soon as the war with Japan ended, a civil war broke out in China. And each of the factions engaged in civil war produced its own money. “Between 1937 and 1949, three governments – the Nationalists, the Japanese, and the Communists – occupied China. Each one issued its own currency (indeed, multiple currencies were issued by each authority). These bodies effectively engaged in monetary warfare, with each producing “propaganda stating that the currency of their enemies was falling rapidly in value,” writes Moniter.
In fact, money supply expanded by 700% between 1946 and 1947. And this also added to an increase in prices other than the supply shock. As Capie writes “Over the whole period of war, the money supply grew by 15,000 per cent, wholesale prices rose by over 100,000 per cent…The vastly increased note issue of the Central Bank of China lay behind the huge expansion in the money supply.”
So an increase in money supply remains an important reason behind high inflationary scenarios, there is no denying that.
Another reason often offered to argue that there will be no high inflation in countries that are currently printing money is that high inflation is an economic curse that only developing countries face. The example that is often given is that of Zimbabwe.
Between August 2007 and June 2008, the money supply in Zimbabwe went up 20 million times. With the money supply increasing by such a huge amount, inflation went through the roof. In early 2008, consumer price inflation was said to be at 2 million percent. By the end of the year it had sped to around 230 million percent.
It is argued that United States, United Kingdom, the Euzo Zone and Japan are no Zimbabwe. Of course that is true. But people who argue along these lines are victims of what we can call the black swan syndrome. Till the first Europeans landed in Australia it was thought that all swans are white. Only when they landed in Australia did they realise that swans could be black too.
Just because high inflation has happened in Zimbabwe, a developing country, in the recent past, it cannot be argued that high inflation cannot plague developed countries as well. In fact, the high inflation that prevailed in Israel in the 1970s and the 1980s is an excellent example of how high inflation can occur even in a reasonably developed country.
As Albert Edwards of Societe Generale writes in a research report titled 
Nikkei 63,000,000? A cheap way to buy Japanese inflation risk “Think about that for a moment. Japan is an advanced economy, a developed democracy and certainly no Zimbabwe. But Israel was all of those things too. It simply found itself politically committed to a level of expenditure – military and social – which it couldn’t fund. Instead of taking the politically unpalatable course of cutting that expenditure, it resorted to the tried and-tested tactic of buying time with printed money. Between 1972 and 1987 Israel’s CPI rose by a factor of nearly 10,000. Inflation averaged around 84% and peaked at an annualised 500% in early 1985.”
Like Israel, countries in the developed world where countries have found themselves politically committed to a level of expenditure that they cannot meet through their earnings and have been printing money in order to meet it. Just because this hasn’t led to high inflation till now is no basis for arguing that it won’t lead to inflation in the future as well.
Given the inevitability of high inflation, gold as a form of investment still remains very relevant despite the recent fall in prices. Having said that one shouldn’t be betting one’s life on it, given that it is difficult to predict when this will happen. As James Rickards the author of 
Currency Wars and a Partner in Tangent Capital Partners, a merchant bank based in New York, recently told The Real Asset Report “I recommend an allocation to gold from investable assets of 10% for the conservative investor and 20% for the more aggressive investor.”

 The article originally appeared on on April12, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

As yen nears 100 to a dollar, Mrs Watanabe is back in business

Japan World MarketsVivek Kaul 
The Japanese yen has gone on a free fall against the dollar. As I write this one dollar is worth around 98.5 yen. Five days back on April 5, 2013, one dollar was worth around 93 yen. In between the Japanese central bank announced that it is going to double money supply by simply printing more yen.
The hope is that more yen in the financial system will chase the same amount of goods and services, and thus manage to create some inflation. Japan has been facing a scenario of falling prices for a while now. During 2013, 
the average inflation has stood at -0.45%.
And this is not a recent phenomenon. In 2012, the average inflation for the year was 0%. In fact, in each of the three years for the period between 2009 and 2011, prices fell on the whole.
When prices fall, people tend to postpone consumption, in the hope that they will get a better deal in the days to come. This impacts businesses and thus slows down the overall economy. Business tackle this scenario by further cutting down prices of goods and services they are trying to sell, so that people are encouraged to buy. But the trouble is that people see prices cuts as an evidence of further price cuts in the offing. This impacts sales.
Businesses also cut salaries or keep them stagnant in order to maintain profits. 
As The Economist reports “A survey by Reuters in February found that 85% of companies planned to keep wages static or cut them this year. Bonuses, a crucial part of take-home pay, are at the lowest since records began in 1990.”
In this scenario where salaries are being cut and bonuses are at an all time low, people will stay away from spending. And this slows down the overall economy.
For the period of three months ending December 2012, the Japanese economy grew by a minuscule 0.5%. In three out of the four years for the period between 2008 and 2011, the Japanese economy has contracted.
The hope is to break this economic contraction by printing money and creating inflation. When people see prices going up or expect prices to go up, they generally tend to start purchasing things to avoid paying more for them in the days to come. This spending helps businesses and in turn the overall economy. So the idea is to create inflationary expectations to get people to start spending money and help Japan come out of a more than two decade old recession.
The other impact of the prospective increase in the total number of yen is that the currency has been rapidly falling in value against other international currencies. It has fallen by 5.9% against the dollar since April 4, 2013. And by around 26.5% since the beginning of October, 2012. The yen has fallen faster against the euro. As I write this one euro is worth 128.5 yen. The yen has fallen 7.5% against the euro since April 4, 2013, and nearly 28% since the beginning of October, 2012.
As the yen gets ready to touch 100 to a dollar and 130 to a euro, this makes the situation a mouthwatering investment prospect for a certain Mrs Watanabe. Allow me to explain.
In the late 1980s, Japan had a huge bubble in real estate as well a stock market bubble. The Bank of Japan managed to burst the stock market bubble by rapidly raising interest rates. The real estate bubble also popped gradually over a period of time.
After the bubbles burst, the Bank of Japan, started cutting interest rates. And soon they were close to 0%. This meant that Japanese investors had to start looking for returns outside Japan. This led to a certain section of Tokyo housewives staying awake at night to invest in the American and the European markets. They used to borrow money in yen at close to zero percent interest rates and invest it abroad with the hope of making a higher return than what was available in Japan.
Over a period of time these housewives came to be known as Mrs Watanabes (Watanabe is the fifth most common Japanese surname) and at their peak accounted for around 30 percent of the foreign exchange market in Tokyo. The trading strategy of Mrs Watanabes came to be known as the yen-carry trade and was soon being adopted by some of the biggest financial institutions in the world.
Other than low interest rates at which Mrs Watanabes could borrow the other important part of the equation was the depreciating yen. Japan has had low interest rates for a while now, but the yen has been broadly been appreciating against the dollar over the period of last five years. This is primarily because the Federal Reserve of United States has been printing money big time, something that Japan has also done, but not on a similar scale.
Now the situation has been reversed and the yen has been rapidly losing value against the dollar since October 2012. And this makes the yen carry trade a viable proposition for Mrs Watanabes. In early October a dollar was worth around 78 yen. Lets say at this price a certain Mrs Watanabe decided to invest 780,000 yen in a debt security internationally which guaranteed a return of 3% in dollar terms over a period of six months.
The first thing she would have had to do is to convert her yen to dollars. She would get $10,000 (780,000 yen/78) in return. A 3% return on it would mean that the investment would grow to $10,300 at the end of six months.
This money now when converted back to yen now when one dollar is worth 98.5 yen, would amount to around 10,14,550 yen ($10,300 x 98.5). This means an absolute gain of 234,550 yen (10,14,550 yen minus 780,000 yen) or 30% (234,550 expressed as a percentage of 780,000 yen). So a gain of 3% in dollar terms would be converted into a gain of 30% in yen terms, as the yen has depreciated against the dollar.
This depreciation is now expected to continue and hence expected to revive the prospects of the yen carry trade. As Ambrose Evans-Pritchard 
writes in The Daily Telegraph “The blast of money is expected to reignite the yen “carry trade” and flood global markets with up to $2 trillion (£1.3 trillion) of pent-up savings, giving the entire world a shot in the arm.”
This money is expected to go into all kinds of investment avenues including stock markets. As Garsh Dorsh, an investment letter writer, 
writes in his latest column “Most recently, the key driver that’s lifting stock markets higher around the world is the massive flow of liquidity via the infamous Japanese “Yen Carry” trade.”
Over a period of time the yen carry trade feeds on itself further driving down the value of yen against the dollar. As one set of investors make money from the carry trade it influences more people to get into it. These people sell yen to buy dollars leading to a situation where there is a surfeit of yen in the market in comparison to dollars. This further drives down the price of yen against the dollar. The more the yen falls against the dollar, the higher the return that a carry trade investor makes. This in turn would mean even more money entering the yen carry trade. And so the cycle, which tends to get vicious, works.
As George Soros, 
the hedge fund manager, told CNBC: “If what they’re doing gets something started, they may not be able to stop it. If the yen starts to fall, which it has done, and people in Japan realise that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche.” And this can only mean more and more yen chasing various investment avenues around the world and leading to more bubbles.
But that’s just one part of the story. The Japanese yen has been depreciating against the euro as well. This has made Japanese exports more competitive. A Japanese exporter selling a product for $10,000 per unit would have made 780,000 yen ($10,000 x 78 yen) in early October. Now he would make 10,14,550 yen ($10,300 x 98.5) for the same product. In October one dollar was worth 78 yen. Now it is worth 98.5 yen.
A depreciating yen means higher profits for Japanese exporters. It also means that the exporter can cut price in dollar terms and make his product more competitive. A 20% cut would mean the Japanese 788,000 yen ($8000 x 98.5 yen), which is as good as the 780,000 yen he was making in October 2012.
This increased price competitiveness has already started to reflect in numbers. Japan reported a current account surplus of 637.4 billion yen ($6.5 billion), for the month of February 2013. This was the first surplus in four months and was primarily driven by increased export earnings.
The trouble of course as Japanese exports get more competitive on the price front it hurts other export oriented countries. The yen has lost nearly 28% against the euro since October. This has had a negative impact on countries in the euro zone countries which use euro as their currency. 
For January 2013, seventeen countries which use the euro as their currency, in total logged a trade deficit (the difference between exports and imports) of 3.9 billion euros.
Japan also competes with South Korea primarily in the area automobile and electronics exports. Hyun Oh Seok, the finance minister of South Korea, said last month that the yen was “
flashing a red light” for his nation’s exports.
Of course if Japan can resort to money printing, so can other nations in-order to devalue their currency and ensure that their exports do not fall. It could lead to a race to the bottom. As James Rickards author of 
Currency Wars: The Making of the Next Global Crisisputs it “we are well into the third currency war of the past 100 years….I am certain that we are closer to the critical state than we ever have been before ”
The article originally appeared on on April 8,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)