September 28th, 2009
12:20 PM GMT
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TOKYO, Japan - Imagine if your paycheck dropped 15 to 20 percent, without cause. You continue showing up for work at the same time, your job performance doesn't change, you don't change anything - but on Friday, your paycheck is 15 to 20 percent less.

Who would be happy?

Well, that's what sort of happened to Japan's biggest companies, thanks to the strong yen.

Now before your eyes glaze over at another currency story, consider this figure, cited by Toyota in a quarterly earnings report: A movement of one yen equals approximately U.S. $400 million for the company.

Before the global economic slowdown, one dollar was routinely worth 110 or 120 yen.  Today, the yen hit a new eight month-high (and the dollar a big low) of just under 89 - that equals about $12 billion in loss.

Without looking at how companies are managed or how the global economy is moving, these companies have already lost billions of dollars, thanks to the currency market.

Companies like Toyota, Honda and Sony are global companies that export to consumer-hungry America, the land of the dollar. Not only do they have to cope with a slowdown in demand, the yen is hammering their bottom line. Not an enviable business position.

Japan's new government came in on a wave of consumer outrage, saying it would get more money into the hands of the consumer.

Japanese Finance Minister Hirohisa Fujii told reporters that the government was not considering jumping into the market to sell the yen and help exporters. No more trickle down like the old government, pledged the incoming Democratic Party of Japan. The mantra of the day is trickle up. Economists wait to see if the new government is right.

Meanwhile, consumers in Japan cheer the news and enjoy the power of their currency at home. But in the boardrooms across Tokyo, there must be quite a different sentiment. They're probably wondering when that 20 percent will come back.

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September 28th, 2009
06:14 AM GMT
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“My accountant says I did this at a very bad time. My stocks are down. I'm cash poor or something. I got no cash flow. I'm not liquid, something's not flowing.” - Isaac Davis in Woody Allen’s “Manhattan.”

There are a number of metaphors that can be used to describe liquidity in the financial markets. One is to think of every object of value – cash, stocks, houses, art – as pieces of ice, frozen in value. Its liquidity can be measured by its ability to melt and reconstitute itself in value while changing hands.

Cash is highly liquid, because there is little change in value when sold or exchanged – so it melts and freezes quite nicely. Rare objects of art are among the most illiquid – they are auctioned and transferred back into cash once every few decades.

A way I prefer to think of liquidity as is oil. What caused the global economy to sputter last year was the commercial paper market, a financial tool as mundane as the motor oil that sits in the engine pan of every automobile. Imagine, however, the oil in every car in the world suddenly drying up below manufacturer specifications – poorly maintained cars start choking, creating traffic jams worldwide. Even Ferraris begin to ping and rattle.

The commercial paper market keeps companies running day-to-day because a going concern’s accounts receivable rarely matches its accounts payable. Large companies regularly borrow millions for one-day, low-interest loans so they can, for example, make payroll while waiting for clients and customers’ checks to clear. When Lehman Brothers went bankrupt, however, the Reserve Money Fund – the market’s oldest money fund that is fed daily by the commercial paper – “broke the buck”. For the first time ever every dollar invested in the fund was worth only 97 cents.

When you hear about “the collapse of the world financial system,” this is the ground zero event. Investors in the traditionally safe fund suddenly run for cover, exacerbating the crisis. Well-run, profitable businesses with no connection to the subprime mortgage debacle suddenly face a liquidity crunch.

Like Isaac Davis in “Manhattan,” the world banking system found “something’s not flowing.” And many of the efforts of governments around the world are to keep the spigot going.



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