Risk aversion is getting out of hand, with gold, Euro, and T-bills being bought mindlessly. A better investment posture, I think, is buying stocks with growth in earnings, current or potential.
Here is Chris Loew’s report from Japan on the yen as promised last week:
The result of the election for president of the Democratic Party of Japan, strongly in favor of Naoto Kan over Ichiro Ozawa, has strengthened Prime Minister Kan’s hand (despite the party not having control of the Upper House). He used the victory to reshuffle his cabinet, purging Ozawa backers. While former PM, Hashimoto was a weak front man for Ozawa’s faction in a loose coalition, Kan may be able to show stronger leadership.
On the yen, though the Bank of Japan is theoretically independent, it is more subject to pressure and more inclined to take common position with the government than the US Fed (at least prior to the current close co-ordination on emergency measures). A common position with a strong PM helps the BoJ for action, as with the current unilateral interventions just after the party election. But the BoJ action may not have a long-term effect unless it is supported by other central banks, as seems unlikely. The intervention seems intended more to discourage shorting speculation from within Japan, or too-rapid changes.
A difference between the US take and Japan’s is how much US newspapers write about China being at the root of yen appreciation by shifting from purchasing US bonds to Japanese bonds. That is not being reported here, the main argument with China being over claims to the Senkaku Islands.
As for actual evidence that the high yen has hurt exports, it is lacking so far. Japanese companies had good profits in recent quarters. If a high yen hurts, this will produce lower profits, rather than massive losses. There are murmurs from the multinationals about offshoring more production, which will no doubt hurt the already poor job market. But the companies will stay in business.
Contacts at a Japanese tiremaker report their profits strongly affected by the high yen, and blame inroads by S. Korean maker Hankook. Car and electronics makers expect a sharp decline in sales after the expiration of government subsidy programs for fuel- and electricity-efficient products. As exporters their markers are obvious downgrades. With a declining Japanese population, the domestic auto market will continue shrinking. S. Korean companies Hyundai and Samsung are expected to continue taking Makret share from Japan.
Though I am fond of picking up underpriced companies when an industry sector is downgraded overall, I find that most Japanese ADR companies have too small profits or too much debt to be good investments now. Those I have recommended are mainly smaller companies traded in OTC and are sometimes difficult to buy. Though I live in Japan, I don’t feel a need to boost holdings if the numbers don’t support it.
As Chris points out, Japan and China may both be trying to cut their exchange rates, while disputing over these tiny islands inhabited, apparently, by feral goats, because there may be oil offshore them. But ironically enough, if Japan gets into a spitting match with China over the islands, it will be more cautious about defying the USA, either by intervening to slash the yen’s exchange rate, or over the vexed matter of replacing the Okinawa military base. That is my view, not Chris’s.
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