Jumat, 08 Maret 2013

The big news is a weaker yen (update)

Six weeks ago I noted that one of the biggest changes on the margin was the sharp decline of the Japanese yen and the equally sharp rise of the Japanese stock market. This meme is still alive and well, and here are some updated charts:

Since the end of last September, the yen is down almost 20% vs. the dollar. According to my calculation of its Purchasing Power Parity, the yen is still somewhat overvalued, but much less so now that it was just a few months ago. A very strong yen represents a deflationary force that was suppressing the growth of Japan's export sector, a key part of the economy. So a less-strong yen should be good news for the Japanese economy, since the yen has been appreciating on and off for the better part of the past 30 years.

Since mid-November, the Japanese stock market is up 40%. It is still quite low from an historical perspective (recall that the Nikkei 225 hit a high of 40,000 at the end of 1989), but now much less so.

This chart compares the value of the yen with the level of the Nikkei 225. Note that the correlation has been quite high for years now. A chronically stronger yen (as shown by the declining red line) has corresponded with a weaker stock market. Now things seem to be changing, and in a big way, thanks to new leadership from Prime Minister Abe which seeks to stimulate growth by relaxing Japan's notoriously-tight monetary policy.

If "Abenomics" does prove beneficial to Japan's economy, as the stock market suggests, this will also be good news for the rest of the world.

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