Japan shakes things up

Back in early January of last year I had a post titled "The biggest news is the weaker yen." Japan had shocked the world with news that it was finally getting serious about stimulating its economy. Perhaps most important was the news that the BoJ wanted to reverse the decades-long, relentless strengthening of the yen. The perpetually strong and stronger yen was the source of Japan's deflationary slump (even though there wasn't much actual deflation). A continually rising yen was strangling Japan's manufacturers and exporters, since they were continually forced to lower their prices to compete with overseas rivals. A weaker, more reasonably-priced and more-stable yen would be a significant first step to reinvigorating Japan's economy.

Today the yen dropped significantly, returning to levels last seen about seven years ago, on news that the BoJ was redoubling its efforts to provide monetary stimulation by aggressively expanding the monetary base. The stock market responded by also jumping to levels last seen seven years ago. The tight, inverse correlation between the value of the yen and the value of the stock market confirms that the strong yen was a big problem for the Japanese economy.

According to my calculations, the yen is now back to levels that are very close to what I consider "Purchasing Power Parity" with the dollar. It's reasonably priced. It's not weak, and it's not strong. It's now a neutral, rather than a negative factor for the economy. The future of the Japanese economy looks brighter. What will really make a difference, however, is a decision by the Japanese government to also adopt genuine fiscally-stimulative measures such as lower marginal tax rates, reduced government spending, and reduced regulatory burdens.

In the meantime, the world was also shocked this morning to learn that the investment guidelines of Japan's (and the world's) biggest pension fund, which currently holds most of its $1.3 trillion in assets in very low-yielding bonds. At least half of this sum will be departing bond land in the direction of equity land, and that is a pretty aggressive move. It's a solid chunk of evidence that the world is becoming less risk averse. That's the broader and most important trend to be found in economies and stock markets around the world these days.

Posted by Unknown

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