Japan’s Big Money Printing Gamble

By: Investment_U

Carl Delfeld writes: Before this year’s sharp upturn, Japan’s economy and stock market had been going nowhere fast for a long, long time.

Let’s put things in perspective.

In 1990, when I was head of Japan equity sales for Robert Baird & Co., the market value of Japan’s stock market was at its peak – roughly 50% the value of all world markets combined.

But by last November, its stock market was down 75% from its peak – representing just 8% of world stock markets.

I went to Japan as an exchange student to learn more about the “Japanese miracle.” But since 1990, the size of the Japanese economy has not increased at all. And during this time, there have been 17 prime ministers and nine stimulus plans.

Not a pretty picture.

You can imagine the pent-up frustration and skepticism when elections were called for once again last December.

But there was something new up the campaign sleeve of the leader of the Liberal Democratic Party (LDP), Mr. Shinzo Abe.

First, he committed to cajoling the Bank of Japan to pump liquidity into its economy to try to get some fiscal mojo and inflation going. Second, he pushed the value of the Japanese yen down to help boost exports profits, which would light a fire under the dirt-cheap, export-oriented stock market.

Japan’s Nikkei 225 started to climb about a month before Abe led the LDP to a landslide victory on Dec. 16. Following his command, the Bank of Japan soon went to work unleashing a torrent of liquidity – three times the pace of our Federal Reserve printing presses.

The results have been just short of spectacular. The Nikkei is up 70% since November.

But as last week’s action proved, Japan is still home to immense volatility. That means savvy investors are smart to ride the booming Japanese bull market, but they must have a trailing stop-loss in place.

The Downside Is Growing
Thinking more deeply and independently, though, let me offer you a contrarian skeptical view on Japan’s weak yen strategy.

First, a weaker yen translates into a cut in the real spending power of Japanese consumers. In effect, it’s a reduction in real income.

How will sharply higher prices for imported food and fuel sit with Japan’s aging citizens? Not well.

Second, a weaker dollar weakens the role of the Japanese yen as one of the world’s reserve currencies. How can the Bank of Japan make sure that a weakening yen doesn’t turn into a full-on rout?

Third, let’s not forget, with virtually no natural resources of its own, Japan is still an import-dependent economy. That means not all Japanese multinationals will have soaring profits since the weaker yen means higher imported raw material prices.

And finally, remember that a weaker yen cuts into returns of foreign investors in Japanese stocks. It hasn’t discouraged investors so far only because Japan’s stock market has risen so rapidly. But eventually, the run will slow and investors will get skittish. We may have already seen the first sign of this trend last week when Japan’s markets made a one-day nosedive.

In short, a policy of weakening your currency is like a drug – you always want more but it never solves the root problem.

Good investing,

Carl

Source: http://www.investmentu.com/2013/May/japans-big-gamble.html

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