Whilst us gaijin were (hopefully) enjoying the Christmas celebrations the land of the rising sun has been busy. It now has a new government and Prime Minister in place and it looks set for a change of direction albeit to one which was Japanese policy until a few years ago. Whilst it prepares its policies (which I discussed on December 17th) some financial markets have already made quite a move in advance.
Japan’s Financial Markets
The Japanese equity market has certainly responded to the prospect of a change in her economic policies. The Nikkei 225 equity index had fallen to an intraday low of 8619 on the 13th of November of this year but since then has embarked on a rally that has now taken it to 10,323 and back to the sort of levels seen before the Great Eastern Earthquake. A 20% rally in such a time period is a strong performance and the latest part has come in spite of poor performances elsewhere. It also coincides pretty much with the electoral cycle.
The Japanese Yen
This too has moved strongly and if we consider it against the US Dollar we see that from an intraday high of 77.41 on the 28th of September it has dropped considerably and is at 85.65 as I type this. So it has fallen by over 10% in this move which also means that it is 10% lower than when 2012 began.
Such a weakening has been an objective of the Japanese authorities for quite some time now and those who had engaged in what looked like foreign currency intervention may well be musing the fact that a more fundamental change in economic policy was required to weaken the Yen. Although a little care is needed as at this point we only have promises of such a change.
Against the currently macho and powerful Euro the Yen has weakened more substantially as a high of 94.34 Yen on the 24th of July has been replaced by the current 113.61 for a 20% move. Over the last three months the UK pound sterling has also joined in the game as it has risen by just under 10% versus the Japanese Yen and now stands at 138.49 Yen. Indeed it is now up by 15% on a year ago.
The Governor of the Bank of England recently repeated his view that he would like the value of the pound to fall. Yet we see here that changes in Japanese economic policy mean that it has undergone a fairly substantial rally against the Yen. Even the United States whose central bank is about to embark on monetary easing involving some Quantitative Easing of US $85 billion a month has seen its currency fall. So in the “currency wars” has Japan shown the way? And has she ushered in a new period of polices designed to repeat the competitive devaluations which so marred economic policies in the 1920s?
Of course the Japanese start from a currency base which has been strong, but the change here does reduce the number of currencies that others can likely fall against by one. And it was not a long list to start with.
Effective exchange rate or economic competitiveness
We can look at this another way which is to look at the effective exchange rate which uses the changes in a countries exchange rate with its major trading partners to calculate its movement. We see that the number for the Yen calculated by the Bank of England has fallen from 183 a year ago to 167 as of Christmas and therefore a little lower right now. If we look further we see that in fact the fall has taken place in the last three months. So quite an economic boost for Japan is underway or more precisely a reduction in the contraction caused by a rising exchange rate followed by a boost.
Putting this another way (h/t @tradedesksteve) each one Yen fall versus the US dollar has been calculated to add 35 billion Yen to Toyota’s bottom line. I think that such calculations beg a few questions but you get the idea.
Inflation, inflation everywhere with not a drop to drink?
Japan has been mired in a long period of disinflation where prices have fallen. Tonight/tomorrow we get the latest update but you get the idea from the November numbers for the Ku-area of Tokyo which had an underlying Consumer Price Index of 98.7 where 2010=100. Yes that does means that overall prices are lower than two years ago.
However the latest currency movements will create something of a commodity price spike in Japanese Yen which is unsual in recent history as such movements which have bedevilled others have been offset in Japan by a stronger currency. Let me explain in terms of the price of a barrel of Brent Crude Oil.
The front month futures price has risen by just under 2% so far in 2012 as it stands at US $111 per barrel as I type this. As an aside that reminds me of the torrent of forecasts for it to fall in 2012! Anyway in Yen terms this means it has risen by 12% or so. In the recent past commodity price rises have been offset to some extent by a rising currency.
So will we now seen an inflationary push? For the first time we might and if we do then there is the prospect that a promised change in policy was enough to kick-start it! Of course for it to be sustained the changes will actually have to happen but we face a prospect which is ignored by many which is that policy changes in time period t can affect matters in time period t-1. Oh what a tangled web and all that…
The Japanese Government Bond market
With the proposed plans for ten billion Yen of fiscal expansionism accompanied and indeed partly financed by monetary expansion you might expect to find the Japanese Government Bond market doing the equivalent of hiding under the stairs! However whilst bond yields have indeed risen one can hardly call a rise in the benchmark ten-year yield to 0.8% a sign of panic. Having discussed some financial markets ability to apparently get ahead of events we face the prospect here of one which may well find itself left behind by them. But perhaps some care is needed as there is evidence that the Japanese may be selling but finding overseas buyers as replacements as their share of the market rose to 9% in the third quarter of 2012.
This is certainly something to monitor because Japan already has a large national debt which has a relatively short average maturity and any sustained rise in bond yields will affect her quickly especially if she runs higher fiscal deficits.
You could possibly plot the likely success of the new economic policies in Japan by comparing rises in bond yields with the economic growth that they create. Those who wish her well will accordingly have to hope that the “bridges to nowhere” fiscal policy of past Liberal Democratic Party administrations has been improved. As we move into 2013 we will find out more about this.
Also as we review the planned fiscal and monetary expansionism we have to question whether she is first down the road that others will follow and the song below will be appropriate in 2013.
I’m turning Japanese
I think I’m turning Japanese
I really think so
Some are already on their way as the US Federal Reserve has embarked on a policy of variable Quantitative Easing. We await to see what US policymakers decide about her fiscal policy. Sooner or later in 2013 I expect the UK to be along too but we will have to see how events begin the year to figure out exactly how this will take place.