sayonara

Japanese exports fell a record 46% in the year to January . The Japanese can happily look back to the good old days (the previous month) where exports only fell 35%........While imports fell too, they fell a lot less, creating a record 953 billion yen (roughly $10 billion) trade deficit. With a trade deficit of that size, the Japanese current account balance will likely show a deficit too for the first time in decades, especially as the investment income surplus is falling.Long time readers are familiar with the causes for this collapse in Japanese exports: first of all there is a general decline in world trade due to the global economic downturn. And secondly, the yen has for the last few months been highly overvalued . If the levels it was trading at last month would have been sustained, the Japanese would be forced to kissto most of its tradable goods industries.Given the fact that Japan doesn't exactly have the kind of good investment opportunities that could finance the huge trade deficits this would create, and given the fact that no foreign central bank is likely to be willing to specifically prop up the yen, it was obvious that the January (and early February) exchange rates were a bubble that would eventually burst. It was only a question of when.While one can never be sure when it comes to short-term market fluctuations, it may have been the case that last months peak level for the yen was indeed the peak of the bubble. The U.S. dollar is up some 9% against the yen since February 2. The yen has lost even more against the U.K. pound and has also lost (somewhat less) ground against most other currencies. Troubling enough for Japan though, the South Korean won has also lost further ground, and is at a record low against the U.S. dollar and near a record low against the yen as well. The won is particularly important for Japan not just because of the fact that South Korea is an important trading partner, but perhaps even more because Japan and South Korea have eerily similar industrial structures (cars, consumer electronics, steel, shipping etc.) and they are therefore trading rivals on the global markets. At current exchange rates of 15.8 won per yen (more than twice the 7.5 it stood at in 2007), Hyundai and Samsung have an enormous competitive advantage against Toyota and Sony.The yen will therefore have to fall a lot more, especially if the won doesn't recover.