When a currency collapse occurs, it occurs all of a sudden. It often occurs even before the total mass of stresses upon the currency doom the currency to failure.
What happens is rapid recession through time of the currency's viability horizon.
When a currency seems doomed in the long run, the smarty pants traders to stay in as long as possible, then get out just before their colleagues and rivals do, maximizing their return at the expense of others. Of course, when pretty much everybody participating in the market is a smarty pants--or thinks that he or she is a smarty pants--this means that each and everyone of them will be trying to beat the other out the door. The combined effect of everyone trying to avoid getting burned pushes the collapse of the currency backward through time, right past the point where the currency, under normal circumstances, would look capable of a rebound.
What I am saying is I think we going to see a run on the Fukuda.
Here are the Cabinet approval rating numbers over the last 10 months, taken from the polling by Sankei Shimbun. The red line marks the resignation of Abe Shinzō as prime minister and the election of Fukuda Yasuo to replace him.
With a 23.8% support rating in the latest poll, conducted on the 2nd and 3rd of this month, the Fukuda Cabinet is only just above the support level (22.0%) granted the first Abe Cabinet after the LDP's historic defeat in the July 2007 House of Councillors election. Abe's numbers rebounded after his unwilling appointment of The Cabinet-of-All-Stars (all-stars except, of course, Justice Minister Hatoyama Kunio) but the numbers fell again when Abe suffered his physical and mental breakdown.
Now there is nothing wrong with Fukuda Yasuo as prime minister, except of course that his private goal in life--the fair and generous management of government personnel--is not what the job of prime minister is about in 2008.
However, for the members of his party, Fukuda Yasuo is a problem. As the LDP's president, he is their leader at election time.
The next House of Representatives elections are going to be held in September 2009 (inshallah). Whenever the election is held, the LDP-Komeito coalition will lose its two-thirds majority in the House of Representatives. However, depending on the popularity of the Cabinet, the LDP could come out of the election as still the largest party in the House of Representatives or it could quite conceivably be annihilated.
So Fukuda needs to get his Cabinet's support numbers back up, ideally above 42%, if he is to lead the party to an unembarrassing result in the September 2009 elections. Unfortunately, with these latest polling results, and the downward trends seen in the results of the polling done by the other news organizations, it seems increasingly unlikely that a Fukuda Cabinet will ever be clawing back up to 45% support.
So if Fukuda cannot get the job done--get back above 42% by September 2009--why stick with him?
And if the party is not going to stick with Fukuda in the long-term, why stick with him now? When is the proper time to bring in the reliever? Why wait, if the conclusion if foregone?
With the rush to form new study groups, alliances and leagues, I think we are seeing the politicians in pursuit of a store of value in which to entrust their futures. They are hedging.
The big boys (and they are all boys) in the Party are still sticking with the Fukuda--and pooh-poohing the Fukuda's weakness, at least in public.
But I think the end is coming, and I think it is coming soon.
More on empirics in Econ 101
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