By Anthony Harrington
By common agreement, the Bank of Japan’s intervention in the currency markets on October 27 failed in its objective to weaken the Yen. That was the third time in a year that the BoJ has powered into the markets in day-raider fashion to try to stem the relentless onward and upward march of the yen. However, while it brings tremendous firepower to bear for the short period of time that its intervention lasts, traders have twigged that the BoJ, unlike the Swiss Central Bank, doesn’t have the stomach for protracted trench warfare to defend the yen.
Blitzkrieg is more its style, so traders just don their hard hats, hunker down, wait for it to move out of the market again and continue as before. Doubtless it blows the stops on any number of long positions when its mega buying spree sends the yen briefly downwards, but from a trader’s perspective this simply makes the BoJ a sort of vandal, creating damage without achieving any notable end. Since the BoJ, in common with central banks everywhere, hates FX speculators, trader frustration will cause it no tears at all. If it could find an easy way of causing them more grief, it would.
As to why it doesn’t stay the course, as one FX fund manager remarked to me recently: “Perhaps it’s because the BoJ retains a vivid memory of that brief period in the 90s when it spent the equivalent of the GDP of the Philippines without having more than a momentary impact on the yen.”
While it looks weird on paper for the yen to be appreciating strongly while the BoJ’s rates are on the floor, running consistent large trade surpluses year after year will do that to you. Plus, as fund managers specializing in Japanese equities have been saying for some time, opportunities for growth in the Japanese economy are looking good right now. Ask top Japanese companies where they see their best growth potential coming from and the odds are extremely strong that they will point to Asia. Exports to Asia now make up more than 55% of Japan’s total exports and there are still a large number of US and European fund managers who haven’t really got their heads around this fact yet.
What tends to dominate their thinking is the previous decade and a half, where the US was the premier destination for Japanese exports and where famous brands like Sony (NYSE:SNE) and Sharp (OTCPK:SHCAF), and of course the Japanese auto manufacturers, made their fortunes. But the list of top Japanese companies today is very different from a list that dates from, say, the start of the 21st century. The big hitters of yesteryear are sliding down the league tables and new names are coming to the fore, all predicated on fresh successes in Asia and emerging markets generally. Against this bullish view, of course, one can cite a number of negatives.
In no particular order they – and their most obvious counter arguments - would look something like this:
(1) lousy demographics – but offshoring solves much of this, and besides, Mrs. Wantanabe is fully cognisant of the implications of the demographic situation and has been saving like crazy to offset it
(2) zero inflation and the ever present threat of deflation – but the average Japanese citizen is pretty comfortable with this and enjoys prices getting cheaper while the strong yen makes it easy to buy imports
(3) a large number of domestic Japanese companies are way behind world class – true, but in which country is this not true?
(4) decades of zero growth is depressing – true, but as we’ve seen, that story could be changing
(5) Look at the TOPIX (Tokyo Stock Exchange Index), it’s still only 10% of what it was in 1989 – yes, but if you look instead at cash flow generated per yen, things are looking very bright indeed.
As ever, you pays your money and takes your chances, but several specialist Global Opportunities funds have been steadily increasing their exposure to Japan over the last year and that trend is accelerating.