Greenspan Comments on Japan's Economy (EWJ, ITF, VPL)

by: Steven Towns

Former Federal Reserve Bank Chairman Alan Greenspan seems to be keeping plenty busy in the short time that has passed since he stepped down from arguably the most powerful financial post in the world. He has already stated at a Lehman Brothers (LEH) event that he thinks the Fed may continue to raise rates. Japanese investors learned during today's trading session that Greenspan joined a financial conference in Tokyo by satellite this past Tuesday. The Nikkei Shimbun reports that Greenspan recognized Japan's economy is recovering and said the economy is on its way towards normalization. Greenspan is also rumored to have described his take on Japan's prolonged deflation following its bubble economy of the late 80's.

There is no denying Japan's economic recovery at this point. Two key issues this year, which I think will pass over relatively smoothly, are (1) when (not if) the BOJ will end its easy monetary policy and (2) what happens to economic reforms and market sentiment after PM Koizumi steps down this fall. So far earnings have been strong across the board but some, including myself are cautious going forward due to the impact of FOREX. However, with Greenspan hinting at the possibility of more rate hikes, the dollar just might stay strong as the differential between rates in Japan and even the EU versus the US widens further.

Sony (SNE) has already said it probably won't be able to duplicate as solid earnings especially if the yen were to strengthen. Honda (HMC), instead of reaping the rewards of a weak yen actually hurt itself by hedging since it didn't expect the yen to depreciate as fast as it did. Toyota (TM) gained an amazing 130 billion yen (approx. US$1.11 billion) positive FOREX impact. Detroit auto manufacturers and politicians aren't happy about that but the latter is believed to be courting Toyota executives in order to bring much needed investment to the state.

1-yr chart of Nikkei 225 Stock Average: