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Rising Sun, Rising Stocks
A sharp change of course has been set in the Land of the Rising Sun. The Bank of Japan has embarked on an aggressive course of monetary expansion that is weakening the value of the yen, hence affecting companies that do business using the currency of the world’s third biggest economy. Indeed, the amount of yen a dollar can buy has seen a rapid rise since last year. The currency’s exchange rate went from 80 yen to a dollar in November of last year to over 100 yen per dollar, and is back closer to 95 recently. Over the same time period, the Nikkei stock index, which includes exporters such as Sony (SNE) and Toyota (TM), saw its value go up as much as 70%, though the index has seen a sharp correction recently after that brisk run-up.
There has not been much to get excited about in the Japanese economy for a long time. And unlike the S&P 500 and Dow Jones Indexes, which recently reached new heights, the Nikkei (currently, at around 15,000) is still off its all-time peak of almost 40,000, which it achieved in 1989. Since that time, Japan’s economy has been stagnant, suffering a “lost decade”, while falling in and out of deflation and recession over the years. Once jewels in Japan’s economic crown, the country’s big electronics conglomerates have seen their market share eroded by competition from able Asian peers. The makeover in the playing field of TV manufacturers over the past couple of decades or so is one telling example.
Recently reelected Japanese Prime Minister Shinzo Abe is trying to get Japan’s economy back on its feet. He has increased government spending to spur growth. He also nominated Haruhiko Kuroda as Governor of the Bank of Japan. The result has been a significant shakeup in Japanese monetary policy that has led to the monetary easing of late.
A wide range of Japanese companies looks set to benefit. As a basic international economics course may teach, a weak domestic currency is good for exporters and bad for importers in that nation. Based on expectations for improved results, Japan’s big car exporting companies, such as Toyota, have seen their stock prices go up handily, as did Sony's, which recently saw its first annual profit in years, partly thanks to the weak yen.
On the other side of the coin, firms that compete against Japanese exporters will have a harder time. This includes traditional rivals from relatively capital-intensive exporting countries such as South Korea and Germany. For example, Korean electronics business giant Samsung will have a harder time competing with Sony. South Korea’s KOSPI Index of stocks is down for the year. German car brands may be relatively less attractive, compared to Japanese models. U.S. competitors like General Motors (GM) will also have harder time. One American company, Corning (GLW), sells glass to Japanese display makers. It recently reported weakness in earnings as its sales were priced in yen rather than in dollars. On the other hand, some companies that buy inputs in Japan will benefit.
Where will Japan’s path of quantitative easing lead it? While the U.S. Federal Reserve has already announced that it may soon be ready to taper off its asset purchases, for now, there is no indication that the Bank of Japan will stop its easing program any time soon. Nevertheless, the policy may backfire. For one, Japan’s aggressive weakening of its yen could lead to a disruptive currency war as other nations seek the same advantage in trade. Indeed, many Asian countries are against the policy. Also, the easy money does little to address fundamental issues in the economy such as the country’s aging population and high levels of debt relative to gross domestic product.
Nevertheless, the assertive move on the part of Japanese policymakers represents a significant shift in the thinking of Japanese economic policymakers. For now, Japan's equity prices may still be in correction mode as investors take profits, but they may see more of an upswing as monetary expansion continues. Investors, even of a decidedly domestic bent, should be aware of how the weak yen will affect their companies' prospects.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.