Kamis, 09 Mei 2013

What's good for Japan is good for everyone

As I mentioned last January, one of the biggest things happening on the margin is the decline of the Japanese yen. It has now fallen to 101 yen/$, a level not seen since late 2008. The big decline of the yen marks what will most likely prove to be the end of Japan's deflation affliction, and it is causing a significant improvement in the economic fundamentals of the Japanese economy.

The chart above shows just how strong the yen was, having reached an all-time high against the dollar of almost 75 in late 2011. By my calculations, that made the yen approximately 50% overvalued vis a vis the dollar. For 40 years the yen had been rising (off and on) against the dollar, from almost 400 to 75: roughly a five-fold increase in its value. This was a near-constant source of pain for Japan's exporters, since they were continuously forced to cut costs in order to remain competitive in international markets. Now the deflationary pressure has been relieved, and in a rather big way. 

As this next chart shows, the value of the yen and the level of the Japanese stock market have been closely correlated for the past several years, especially since mid-November: the yen has dropped over 20%, from 79 to 101, and the Nikkei 225 has soared by 68%, marking one of the sharpest equity rallies in memory.

What's good for Japan is good for the U.S.: since mid-November the S&P 500 is up 20%. 

Gold is telling us that Japan's new monetary policy is not likely to be inflationary; since mid-November, gold in yen terms is up only 5%, while it has declined 15% in dollar terms. Indeed, gold's fall suggests that investors may be realizing that buying productive assets is likely to be more rewarding in the long run than speculating on commodity prices. 

The return of a more healthy growth outlook in Japan has already made equity investments in general more attractive than speculating in commodities, which are about flat since mid-November. As the chart above shows, the market cap of global equities is up 18% ($5.7 trillion!) since mid-November. The increase in the value of global equity markets since mid-November has been of the same order of magnitude as the value of the world's entire stock of gold, which is estimated to be as much as 175,000 tons, or roughly $8 trillion at today's prices.

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