Japanese Grandma vs British Grandma: The Butterfly effect in global economy

Written by Frank Calviño

What is globalization? Globalization is the National Japanese Pension Fund losing 52 billion dollars due to the Brexit economic tsunami. The fact that you have a bunch of japanese  grandmas and grandpas rioting -at the polite level that any japanese, specially elderly, its culturally allow to riot- on the streets of Tokyo, because some other elderly people -as the pools have shown- decided to kick in the ass the European Union in a cold and lonely -now days very, very lonely- island on Europe, it’s the perfect definition of Globalization. 

And besides the phytonesc picture -from the Monty Python of course- of a japanese grandma accusing a british grandma of stealing their pension by voting in favor of the Brexit, due to the british one accusing the EU of stealing the money that was reserved for THEIR pension, the reality is that, when confronted by the severe consequences derived from of our global economy, nobody is laughing. 

“The flap of a butterfly wings in Brazil, could set a Tsunami in Japan” or so it says the famous “Butterfly Effect” something very close to our more real “The flap of a fat london crow set indeed an economic tsunami on Japan”  Well, at least that is the metaphoric explanation. Reality is far more complex, and surprisingly, far more bizarre. 

Good bad things 

The fact that your currency increases in value, should be a positive thing for almost every market in the world. Almost. Japan Topix is one of those few exceptions that confirm the rule. If the yen rises, Topix (Japan stock market index) usually plunges. Why? To make this story short -and try to keep it simple for anybody without a postdoctorate in economics- the Japanese stock market depends a lot on the exchange rate between the dollar and the yen. A semi weak yen allows for easier exports, japanese made products are affordable in the USA. Therefor, if the yen rises its value, Japanese exports rise in cost and become less likely to be bought in the USA. 

This leads to an scenario akin to a chess game. Japan needs to look affordable to be competitive. Needs its yen relatively low in the exchange rate with the USA. At this point the keen reader will be a bit lost, and probably asking himself “What the heck the yen-dollar exchange has anything to do with the Brexit?” Well it does, a lot. Many people, many investors to be precise, felt that the sudden exit of the United Kingdom from the European Union will harm their interests, and decided to move their capital towards “safer waters”. Considering that the Brexit will surely harm the pound and the euro, and that the dollar is far to mingle and interrelated to this two currencies, many people shifted their investment to yens. They are safer, belong to a ultra-developed first world country, with an stable economic growth and a stable government, and they are cheap! That part was the icing in the cake.

The irony is that, once the money started flowing towards Japan, once the yen became a prized currency and investment funds all over the planet began bidding to buy yens, the same reasons behind the positive valuation made by the markets of the yen, evaporated. More people buying yens means the japanese currency became more expensive, more sought after, and it reevaluated itself against the dollar. Making Japan exports more expensive in turn, lessening the future income of Japan, and making the country poorer in the near future. To make matter worst, many Japanese governmental funds take advantage of the beneficial exchange rate by investing in dollars and then paying in yens. One of those funds was the National Japanese Pension Fund. And in the blink of an eye, 53 billion dollars -calculated at its exchange rate towards the yen- evaporated in one of the biggest bubble like effects in modern japanese history.

 

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Frank Calviño

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