On Aug. 30, the Bank of Japan, its country's central bank, announced a major new program of monetary stimulus. The governor of the bank even flew back from the Federal Reserve's Jackson Hole, Wyo., conclave of the world's central bankers for the announcement. The same day, the Japanese government announced what it billed as a significant new economic stimulus package.
And the financial markets blew a giant raspberry.
The moves had been designed to slow the relentless appreciation of the yen, which has killed Japanese exports by making them more expensive and which threatens Japan's economic recovery. But the yen actually climbed on, finishing the day at 84.5 to the U.S. dollar. That wasn't far off the 15-year high for Japan's currency that was set last week.
The yen seems doomed to keep climbing. Japanese exporters seem doomed to keep sinking. Japan's economy seems doomed to fall back into recession. And the country's central bank and government seem powerless to stop it.
Interested yet? I am.
Sell Japan, and give me some bargains
Japan is still a huge economy and home to some of the great export companies with some of the most recognized brands in the world. Its corporate resources in robotics, biotechnology and industrial-materials research and development are among the best in the world. Its stunning government debt is supported by one of the globe's deepest pools of consumer and corporate savings.So bring on the doom. Write off Japan. Sell Sony (SNE, news, msgs), Toyota, Honda Motor (HMC, news, msgs) and Canon (CAJ, news, msgs).
The yen will turn one day despite all the dysfunction of Japan's politicians. And the tide that has drowned even the best of Japan's companies will recede to leave the best still standing. And when that tide turns, I'd like to be able to say that I picked up some of those great companies at doom-and-gloom prices while most investors were selling them.
Let's start by understanding why investors are so gloomy about Japan. The yen is the focus of the gloom, but it's a symptom of the problem and not really the cause.
5 reasons the yen is a refuge
The yen has become the global refuge of choice. That seems odd given the country's economic, political and demographic problems. But for the short term, and that's all that currency traders and safety hunters are looking at, those negatives are outweighed by the positives of the Japanese currency.First, perversely, the country's economic and political problems just about guarantee that anyone buying yen in the form of government notes or bonds won't get blindsided by a rise in interest rates that sinks the value of their holdings. The Japanese government isn't about to raise rates. It would lower them if it could.
Second, also perversely, the inability of the Bank of Japan or the Japanese government to do anything effective to weaken the yen means that buyers of yen don't have to worry about currency intervention sinking the value of their positions.
Third, to own yen, you don't actually have to have cash. In other words, you don't have to raise money by cashing out other investments to buy yen. You can simply borrow in the yen market to buy yen instruments. Because interest rates in Japan are so low, if you want to borrow to buy yen and you're a big institutional investor, you'll pay almost nothing. That makes the yen an ideal hedge on other investments because you don't have to sell those investments to put on the hedge.
Fourth, as long as we're speaking of hedges, the yen and the U.S. economy are very attractively inversely correlated right now. The yen rises when worries about the U.S. economy increase. Want to hedge the risk of U.S. stocks? Buy yen.
And lastly, buying yen is a bet on a very strong and clear trend. You buy yen until data and attitudes toward the U.S. economy and global assessments of risk change. Then, because the market is so liquid, you simply sell. (We'll see if the "everybody can get out without a problem" optimism is justified this time.)
Continued: Japan moves, market laughs
