PARIS — The Bank of Japan’s extraordinary new anti-deflation policy was making waves throughout the global financial system Monday, driving down the yen and lifting share prices in Tokyo, but economists said the effect has yet to be fully felt overseas.
The most visible sign of the central bank’s move was the sharp decline of the yen and a 2.8 percent rise in the benchmark Nikkei 225 stock average. The dollar was trading at ¥98.905 on Monday afternoon in New York, a four-year high. The euro traded at ¥128.75, its highest level in more than three years.
“They’re taking a page out of the quantitative easing playbook, multiplied two and a half times what the Fed is doing,” said Michael Strauss, chief investment strategist at Commonfund in Wilton, Connecticut.
That, he said, creates a situation where both institutions and individuals are facing pressure to buy equities, at home and overseas.
The shake-up was touched off Thursday by Haruhiko Kuroda, the new Bank of Japan governor, who announced a decisive break with his predecessor’s policies, saying the bank would nearly double the amount of Japanese currency held by individuals and banks over the next two years as the institution tries to raise the annual inflation rate to its new 2 percent target.
Mr. Kuroda’s plan calls for the central bank to inject nearly ¥62 trillion, or $630 billion, into the economy this year, new money that must find a home. Some of that will undoubtedly end up overseas.
“This is a very big new injection of money into the global system,” said Thomas Mayer, senior adviser to Deutsche Bank in Frankfurt, and overseas bonds and equities will be among the beneficiaries.
U.S. bonds and stocks, which are already trading near record levels, are one obvious target for investors with yen to spend, he said. Core European countries like Germany, France and Britain are also favored destinations for Japanese capital, as are Australia and New Zealand.
Debt of governments in the developed world is already trading at very low yields, Mr. Mayer noted, but as long as the euro zone crisis continues, struggling southern euro countries like Spain, Italy and Portugal may attract rather less investor interest because of concern about political risk.
While the size of the Japanese intervention is perhaps unprecedented relative to the size of the country’s economy, the Bank of Japan is not alone. The Federal Reserve, the Bank of England and the European Central Bank have all poured in liquidity and worked to hold interest rates down as the global financial sector creaks along year after year. That money is credited with helping to keep government borrowing costs low and to push the Dow Jones industrial average to a record high this month.
A weakening Japanese currency opens a window for international investors to profit on two fronts. With the central bank’s main interest rate target near zero, they can borrow the Japanese currency cheaply, then lend it abroad.
This “carry trade” offers the possibility of higher returns overseas — and if the yen falls, investors also reap a foreign-exchange gain since they can repay the loan in cheaper yen.
Of course, a rising yen would bring the opposite result, but the magnitude of the central bank’s plan could convince investors that the currency is set to fall further.
Julian Jessop, chief global economist at Capital Economics in London, estimated that the dollar would continue strengthening to ¥110 this year and to ¥120 next year.
“The Bank of Japan’s new policy stance surely does amount to a game-changer,” he noted, “at least for the currency markets.”
The weakening yen may also be felt by companies operating outside Japan — like American and German automakers and South Korean gadget manufacturers, which compete head-to-head with Japanese corporations. Those companies may find themselves under pressure to squeeze profit margins to compete against suddenly flush Japanese competitors.
“Some of these Japanese companies were profitable at ¥78 to the dollar,” Mr. Strauss said, so the dollar at ¥100, or “parity,” will be a boon for the corporate sector.
“This will provide a reliquidification of the Japanese market,” he said.
It will take time for competitors to Japanese companies to feel the effects, Mr. Mayer said, but he cautioned there were larger concerns to consider: “By injecting such a large amount of money into the global financial system, you may end up distorting prices in such a way that it causes distortions in the real economy.”
Mr. Strauss said the biggest impact would be felt in Japan, where an investor could hold a 10-year government bond with a yield of less than four-tenths of a percent, or could take on a little more risk in stocks.
The lesson after the Japanese investment bubble collapsed in 1990 was “never own equities again,” he said, but the moment may have arrived where that no longer holds true — with a payoff for the country and markets overseas.
But Japanese investors are more cautious than those of a generation ago, he added.
“I don’t think they’re going to go out and buy Pebble Beach,” Mr. Strauss said, referring to the legendary golf course in California acquired by a Japanese business owner in 1990 at a wildly inflated price.
Article source: http://www.nytimes.com/2013/04/09/business/global/yen-slides-close-to-level-of-100-to-the-dollar.html?partner=rss&emc=rss
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