We’re long on Japan, we said. Today comes word that Japan’s economy is expanding at its fastest rate in nearly three years… and twice as fast as the United States. Japanese stocks, too, are in an upward trend.
We don’t claim to know anything about Japanese companies. It is the yen that draws us to them. Our guess is that the yen will go up. If that happens, a yen-denominated stock should go up too.
The yen is perhaps the most un-loved major currency in the world. The only people who seem to like it at all are those who borrow it; and they do so only to be able to trade it for some other currency. The yen has become like the poor boy your daughter gets to take her to the party, just so she might meet someone she really likes!
But the beauty of the investment world is that the nerds and rejects get their moments of glory too. The yen – disrespected by practically everyone – must be ready for a little upgrade.
Ian Davis gives us a little background:
“On September 22, 1985, France, West Germany, Japan, the United States, and the United Kingdom all agreed to a radical revaluation of world currencies. On that day, these countries signed the Plaza Accord, stating that they intended to devalue the U.S. dollar in relation to the Japanese yen and the German deutsche mark through intervention in the world currency markets.
“Between 1985 and 1987, the yen appreciated by 100% relative to the U.S. dollar. A similar revaluation could happen again soon.
“Today, the yen is even cheaper relative to the U.S. dollar than it was in 1985. Furthermore, the amount that Japan exports as a percentage of its GDP is higher today than it was in 1985, before the yen was revalued.”
If this moderation continues apace, you might expect the yen to remain low…and still enjoy continued reasonable growth in your Japanese stocks. If the moderation ends in a frenzy, however, the yen could be revalued in a hurry, as the yen carry trade is unwound. Speculators owe billions of dollars worth of yen – perhaps even a trillion. When they go to repay, yen will be the big man on the currency campus.
The Daily Reckoning Australia