For months the country and world have been focused on the threat of a looming trade war. Last week the specter was raised of a currency war. Comments that President Norihiro Takahashi of the Japan Government Pension Investment Fund delivered made such an outcome a real possibility.
Takahashi argued that assets in the United States are no longer expensive in his Wall Street Journal interview. This statement represents a huge change of opinion from the quarter that ended in December. This was when the biggest pension fund in the world significantly reduced its foreign assets’ exposure.
Analysts are seeing the comments of Takahashi as a subtle protest by the Japanese at how strong the yen has become. In only the first three months of 2018, the Japanese yen has rocketed up an incredible 6.6 percent versus the dollar so far. This occurred even with the backdrop of bond yields in the U.S. rising as the chart shows:
The good news is this means that Japanese investors will find Treasuries considerably less expensive now than they did at the end of 2017. They were dumping them then. The U.S. depends on foreign buyers like Japan and China to help soak up the Treasury debt it floats to pay for the government’s runaway spending.
The bad news is that a currency war could be bad for U.S. markets. Yet the Japanese have a very real interest in driving the yen lower. Bank of Japan Governor Haruhiko Kuroda officially denies this. The facts argue otherwise.
Corporate earnings in Japan are extremely cyclical. This is complicated by the fact that firms on the Topix index obtain over 37 percent of their corporate earnings from overseas markets. It means that a stronger yen can force Japanese stocks to crater. This in turn stifles domestic consumption in their country and pushes the Japanese economy towards deflation once again.
Today’s reality makes the problem worse for the Japanese monetary authorities. The Topix is off over 10 percent from the high it made in January. The BOJ inflation measurement is the CPI ex-food. It showed a mere .9 percent for January. This is significantly lower than the two percent rate the Japanese have been desperately trying to hit since 2015.
Worse still for BOJ Governor Kuroda is that his policy toolkit appears to be nearing empty. He has already bought up an all-time high of 40 percent of Japanese government bonds. Kuroda simply does not have many assets left to purchase.
This leaves him with another option of weakening the yen against the dollar in a currency war. It may be a desperate measure. These are difficult times for Japan.
The dollar has become annoyingly weak to them. New Federal Reserve Chair Jerome Powell has already signaled for minimally three interest rate hikes in 2018. Still the dollar does not strengthen.
Japan promised it would hold its 10 year bond yields to zero percent in an effort to see the interest rate differential with the U.S. widen. Despite this the dollar has weakened further.
Is Your Retirement Portfolio Protected from A Potential Currency War with Japan?
President Trump and his administration have pursued policies that favor a weaker dollar. This would boost exports. The problem is that such a “race to the bottom” conflicts with the Japanese economic interests. Now they are looking for ways to counteract it. Fortunately you don’t need to lose sleep over a possible currency war negatively impacting your retirement holdings. Gold has a long track record of safeguarding investors’ assets from currency manipulations.
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