As short-sellers circle the yen, a repeat of 1997 Asian crisis looms

Dr Andy Xie is a Shanghai-based independent economist specialising in China and Asia, and writes, speaks and consults on global economics and financial markets.Japan is falling into a trap in defending its currency against the US dollar, like Thailand in 1996. Japan’s large forex reserves make the Yen a juicy target, rather than deterring currency predators. Its fundamentals are weak and deteriorating, making the Yen’s further decline inevitable.Japan can’t raise interest rates aggressively to defend its currency due to its high national debt. It could fall into an inflation-devaluation spiral, greatly profiting Yen short-sellers.The Yen is trading above 160 to the US dollar again, just a month after a massive government intervention. Japan’s foreign exchange reserves stand at over US$1.3 trillion but further interventions will only cost more and be less effective, allowing short-sellers to build larger positions.