Your cleanest dirty shirt
To Mohamed El-Erian, the world’s major reserve currencies — the dollar, the euro, and the yen — are a bit like your dirty laundry; every shirt is dirty, but compared to the alternatives, they historically have been the “cleanest dirty shirts.” El -Erian thinks that arrangement will not last forever. He tells Chrystia that a long-term trade that PIMCO likes is a long position in the currencies of the successful emerging markets — the clean shirts — funded by the currencies of the U.S., the EU, and Japan.
El-Erian forecasts a medium-term weakening of the yen as Japan will repatriate more funds than the market currently expects in order to finance reconstruction. Of the three options Japan has for funding reconstruction — borrowing, repatriating funds, or monetizing debt — repatriation has the fewest risks. With a debt-to-GDP ratio well north of 200% and a diminished credit rating of AA-, borrowing money or monetizing debt could each cause a rise in Japan’s interest rates.
In the near-term, though, before Japan can think about reconstruction it will have to muddle through the immediate aftereffects of the tsunami: a one-off destruction of wealth and a 25% reduction in Japanese energy generation. El-Erian pointed out that auto companies and tech firms around the world continue to announce production slowdowns due to the tsunami’s of supply chains — just two days ago Ford announced a temporary shutdown of a factory in Belgium in order to preserve car parts. His biggest worry is the “stagflationary wind” that’s blowing from Japan towards the rest of the global economy.
Posted by Peter Rudegeair.