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Japan Tries Weakening Yen to Strengthen Economy

26 April 2013 in Trading Ideas

It may be asking a lot for investors to believe that Japan can revive its economy after decades of lackluster performance, but the recent surge in the country’s stock market at least has delivered glimmers of hope to some.

Much of that hope arrived late last year with the return of Shinzo Abe as the country’s prime minister, and, along with him, his aggressive plan to spend “whatever it takes” to get Japan moving again.

Aside from broader issues such as Japan’s aging population and its outsized public debt, the country’s economic fortunes have been hampered by the strength of its currency, which has had the effect of making Japanese exports more expensive to foreign buyers, thereby hitting the bottom line of the country’s large conglomerates.1

In conjunction with Abe’s yen-spending rhetoric was his stated intention to implement policies to weaken the yen, which coincidentally dovetailed nicely with the Bank of Japan’s decision last December to expand its asset purchase program by the equivalent of an additional $119 billion.2 A weaker yen would theoretically lower the costs of products made by Japanese firms and boost their profits.

That scenario forms the thinking of the new QE Japan motif, a portfolio of Japan-based stocks and currency exchange-traded funds that seek to take advantage of the yen’s decline against the dollar – and a sustained Japanese economy.

So far, the yen has responded, sinking 20% in the past six months.

In addition, the economy has begun to show signs of life. Fourth-quarter GDP rose 0.2%, following two consecutive months of contraction.3

Investors have also seen good news in upticks in confidence and machinery orders – so much so that it hardly seems a coincidence that the recent fall in the yen saw Japan’s Nikkei index surge 40% to nearly five-year highs in the same timeframe.

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The next test will be whether the country can meet economists’ consensus expectations of 2% annualized growth for the year’s first quarter. A substantial miss could stop the Japanese stock rally in its tracks.

1Puneet Pal Singh, “Shinzo Abe’s challenges in reviving Japan’s economy,” BBC.com, Dec. 17, 2012, http://www.bbc.co.uk/news/business-20752410,” (accessed March 19, 2013).

2Yuri Kageyama, “Will Japan’s honeymoon with ‘Abenomics’ last?” Associated Press, Dec. 12, 2012, http://business.financialpost.com/2012/12/20/will-japans-honeymoon-with-abenomics-last/,” (accessed March 19, 2013).

3Keiko Ujikane, “Japan Returned to Growth in Fourth Quarter in Boost for Abe,” Bloomberg.com, March 7, 2013, http://www.bloomberg.com/news/2013-03-08/japan-returned-to-growth-in-fourth-quarter-with-0-2-expansion.html, (accessed April 23, 2013).

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Tags: QE Japan
  1. Max Cantor
    30 Apr at 5:49 pm

    From a basic macro perspective, this devaluation is obviously attractive for investors looking at Japan’s major exporters, if for no other reason than to ride the wave of market reaction to Bank of Japan announcement. However, in constructing any leveraged product or motif seeking to take advantage of such a devaluation, it is fundamentally important to focus almost exclusively on export oriented companies and their financiers, rather than on general Japan-based domestic oriented companies. Currency devaluation on island nations has traditionally had a much more noticeable impact on domestic purchasing power parity (PPP) than on continental countries. Though this impact is generally heightened in emerging/developing markets (see Jamaica’s devaluation for an example), the fundamental nature of island economics is such that imports are inherently more expensive, and significant decreases in domestic spending power as a result of the heightened costs of basic consumer goods can hamper the earnings prospects of domestically oriented companies.

    Obviously, companies like Toyota and Nomura Holdings will benefit from this move, but I am of the opinion that a QE Japan motif should be more focused on export oriented companies rather than the Japanese economy as a whole, especially in considering the relative lack of downside this news represents for such companies. Including highly diversified Japan ETF’s in such a motif would almost certainly hamper the mid to long term growth prospects of the investment, as the devaluation will likely give a far larger bump to exporters than it does to the general Japanese economy.