Over and over, financial news airwaves are filled with noise about since the Bank of Japan–under the supervision of Governor Kuroda–has embarked on a massive dose of Quantitative Easing, there has been no real outflow of YEN around the world. The only problem with this bloviating is that its devoid of fact. The BOJ’s action, or rather, call to action has led to a drop in European bond yields as well as a new pillar of support for U.S. Treasuries. Further proof is last night’s employment data from Australia, which was much weaker than expected (a 36,000 job loss and a 0.2% jump in the unemployment rate to 5.6%), but the AUSSIE DOLLAR rallied after an initial selloff as Japanese investors are seeking higher returns. A favorite place for higher yields for Japanese seekers has been Australia and New Zealand. Many financial institutions offer what are known as Urudashi and Samurai bonds. These are bonds issued in Japan in foreign currency of usually kiwi and Aussie. Those who say that the Japanese don’t invest afar and remain in Japan–what is called HOME BIAS–are badly misinformed.
The mega cash piggy banks of Japanese insurance companies and other annuity writers have to ensure a high enough returns to satisfy an aging population. The need to procure higher yields has been an important financial weapon during the last two decades. Yes, since the onset of the great global debt crisis Japanese investors have been cautious like all others, but now that the BOJ and Ministry of Finance have embarked on an INFLATIONARY JOURNEY WITH A YEN DEPRECIATION KICKER. It is time for Japanese investors to search out the proverbial CARRY TRADES. A classically great CARRY TRADE is when you can sell a currency of very low yield and by a higher yielding currency for extra return, but the big returns come when the CURRENCY THAT IS SOLD DEPRECIATES AGAINST THE HIGHER YIELDERS, resulting in sizable gains–the proverbial HOME RUN. The Brazilian real was the recipient of such a trade from 2008 to 2011. The Brazilian currency became so strong that the government installed a tax on foreign short-term inflows and the Brazilian Central Bank lowered interest rates during the course of 18 months by 5 percent.
The impact of the weakening YEN is certainly being felt in the auto markets as the Japanese BIG THREE–Honda, Toyota and Nissan (below right)–are on 52-week highs and have certainly gained significantly since the YEN began weakening in MID-OCTOBER of 2012. In the same period the German auto makers (below left) are languishing in the middle of their long-term price ranges. In the same period the important EUR/YEN crossrate has risen 30%–from 100 to 130–with much of that coming on the heels of the Prime Minister ABE’s election. Home bias is also the same theory that Chairman Greenspan promoted back in 2003 and 2004 as to why ultra-low rates would not have to great an impact on the U.S. DOLLAR–Americans don’t invest abroad. The only think that the “maestro” failed to understand is that hedge funds and global banks have the ability to overpower the small investor through the use of massive leverage. HOME BIAS, nice theory with no basis in the contemporary financial world.
***Just a quick note on Australia. I have argued that the Reserve Bank of Australia has been wrong to keep the overnight lending rate at 3%. Why? The 2/10 curve in Australia is the flattest in the developed world (except for Japan’s but that will be covered Sunday) and that a rate cut was badly needed. Last night’s unemployment report sent a warning shot and it is rumored that RBA Governor Stevens is holding off an immediate cut and is waiting to cut prior to September’s elections so as to aid PRIME MINISTER Julia Gillard. This is covered in a Bloomberg story, “Just-In-Time RBA Rate Cut Seen Helping Gillard,” written by Michael Heath and Christine Aquino. It is worth a read and though I don’t like the conspiratorial nature of the piece it helps explain why the RBA has been lax in moving to steepen a very flat curve.