Japan. We’ve written on it a million times. We’ve stayed relentlessly bullish on it despite the opportunity cost and the loneliness of the position. We’ve put up with mockery and endless accusations of blind-spottery.
Why? Because the yen has been too strong and Japanese stocks too cheap for too long (they are “priced for technical insolvency”, one analyst told the FT this week). And, being long term investors, we decided just to take a position and wait (it worked with gold after all). It hasn’t gone that well.
US stock markets have doubled since their post-Lehman lows. But over the same period, Japan has seen a pretty extreme upturn in the yen and a total market gain of a mere 10% or so. MoneyWeek readers will have been protected to a degree by the rise in the currency value of their holdings (up 50% against the won and 30% against the dollar and the euro since 2007). But nonetheless, I dare say most of you wish you’d been holding almost anything but Japan since the financial crisis began.
Good news then that this might – just might – be the year it all works out. Investors have already embraced what the FT is calling the “Abe Trade” and the market is up by 20% or so since ex-premier Yoshihiko Noda called an election back in November.
The idea is that major money printing in Japan, prompted by a new inflation target or just by a general desire to be in the currency wars for real will push the yen down and the market up. Will it happen? It is already happening.
Japan’s monetary base rose by 5% in November and nearly 12% in December, and by last week the yen had weakened against the dollar for eight consecutive weeks (that hasn’t happened since 1989). New PM Shinzu Abe has made it absolutely clear that he intends to do all he can to weaken the yen to the extent that if the central bank doesn’t go along with his (pretty feisty) plan for a 2% inflation target at its next policy meeting (20 January) he says he will consider revising the Bank of Japan Act.
He is also planning an emergency economic stimulus package (due to be approved tomorrow) that is to chuck something in the region of $230bn into the economy via various tax breaks and credits. Add it all up, says Halkin’s Robert Brooke, and it all shows a “buzz to policy that has long been absent in Japan.”
There is also a tempting theory doing the rounds that some of this is about geopolitics. With China appearing to get stronger and stronger, the Americans need Japan strong too, says Tokyo-based Ryoji Musha of Musha Research. That might mean there is no opposition from the US to a weak yen policy (Musha believes that Japan has been under heavy pressure from the US over the last 20 years or so to “stop the bottle” of its economy and keep the yen strong in order to protect US industry).
Either way, if the yen is allowed to keep weakening- or is strongly pushed to do so – this will be an event of “historic proportions” which “may well signify” the end of Japan’s 22 year deflation. That would be nice (for investors if not Japanese pensioners).