Asia Asian Wall Street Journal May 7, 1998

Asian Wall Street Journal

May 7, 1998

U.S. Investment Adviser Says Yen Could Weaken Over Next 5 Years

by Jon E. Hilsenrath

Japan’s currency could weaken to 278 yen to the dollar during the next five years, says Martin Armstrong, chairman of Princeton Economics International Ltd., an investment advisory firm.

In the process, it is likely to knock China’s yuan and the Hong Kong dollar from their respective links to the dollar, diminishing their value by 15% to 30% in the coming year, he adds.

“China will have no course of action but to follow suit,” he says, adding, “Their economy will contract unless they let it go.” Although he said he expected no action until at least after July 1, the first anniversary of Hong Kong’s return to China.

The comments of Mr. Armstrong, a technical analyst and investment adviser who predicted that Japan’s currency would reach a peak near 80 yen to the dollar in 1995, are closely watched in Japan. After three weeks visiting the region from his New Jersey headquarters, he is particularly bearish.

“Virtually every (Japanese) manufacturer that I talk to has plans to continue to move offshore,” he says, blaming high Japanese tax rates and a lack of domestic investment opportunities.

The capital flight will be a major source of downward pressure on the currency. A dollar currently buys around 133 yen, but Mr. Armstrong sees that level weakening to 145 yen by the end of the year, and then to 200 yen in 1999. “What you’re really looking at is the collapse of Japan Inc.,” he says.

Underscoring his bearishness, Japan’s finance ministry reported last week that its reserves shrank by $17.8 billion in April—by comparison, about as much as Australia’s total reserves—as the central bank attempted to prop up the currency by selling dollars and buying yen. Meanwhile, the jobless rate has risen to a record 3.9%.

Among his other predictions, Mr. Armstrong says Japan’s Nikkei Stock Average will slip below 10000 points, to 9700, next year. While other Asian stock markets appear to have bottomed out, he says troubles in Japan will delay recoveries in other Asian stock markets this year.

“He’s made some good calls and some bad calls,” says Mac Overton, fund manager at MGf United Trust Managers, adding, “I heard him make a call six to eight months before the yen hit 80. He said it might go to 76. He pretty much nailed that one. He got my attention then.”

In September 1997, Mr. Armstrong said Hong Kong’s Hang Seng Index was heading for a “Panic Cycle year” in 1997, a prescient forecast, but his timing was off. Mr. Armstrong said Hong Kong stocks would rally and collapse before the reversion to Chinese rule. But the market collapsed several months later.

Among his other predictions for this year: Mr. Armstrong says European stock markets are reaching a bubble that will be popped over concerns about the implementation of the euro currency. That, he says, will keep capital flowing into the U.S. stock market in the months ahead.