The most visible sign of the move by the bank, which is the country’s central bank, was the sharp decline of the yen and a 2.8 percent rise in the benchmark Nikkei 225-stock average. The dollar settled at 99.32 yen on Monday in New York, a four-year high. The euro traded at 129 yen, 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 H. Strauss, chief investment strategist at Commonfund in Wilton, Conn.
That, he said, created a situation where institutions and individuals both faced pressure to buy stocks, at home and overseas.
The shake-up was touched off on Thursday by Haruhiko Kuroda, the new Bank of Japan governor, who announced a decisive break with his predecessor’s policies. He said the bank would nearly double the amount of Japanese currency held by individuals and banks over the next two years as it 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 yen, 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.
United States stocks and bonds, which are already trading at high 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.
The debt of governments in the developed world is already trading at 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 in good company. 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 high levels 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 yen 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 persuade 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 yen this year and to 120 yen 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 device 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 yen to the dollar,” Mr. Strauss said, so the dollar at 100 yen would be a boon for the corporate sector.
It will take time for competitors to Japanese companies to feel the effects, Mr. Mayer said, but he cautioned that 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 effect would be felt in Japan, where an investor could hold a 10-year government bond with a yield of less than 0.4 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.
But today’s 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,” he said, referring to the golf course in California that was 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