The Japanese Light-Switch To Growth

This impending currency war, dramatically leading up to the G20 in Russia this weekend, will ultimately become a shot of adrenalin for the global economy.  Global central banks (and their most vocal governments) are manipulating their currencies lower through expansionary policies in a bid to help their exports.  Japan already took the lead, as the BOJ moved its inflation target higher and increased its repurchase program, sending the Yen 17% lower over the past 3 months.  Europe, who competes with Japan on numerous exports, has some catching up to do, already debating inflation targets in Britain while Draghi has gone on the (verbal) offensive, with rate cuts possibly on the table.  This means more cash pouring into the economy from all sides; a flood of capital, pure adrenaline.

The impending tide of capital is exactly what equity markets need to push through their previous highs.  Most US markets are buttressed 1-2% beneath record levels, while the Russell 2000 & DJ Transports have already broken above.  From a technical –volume, volatility, and moving average– standpoint, this year’s rally shows no signs of stopping.  All is smooth sailing and a currency war look likes a nice gust of wind.

- FT 3/4/13

– FT 3/4/13

6 thoughts on “The Japanese Light-Switch To Growth

  1. True global monetary expansion could help stocks in the near term but the risk / reward seems incredibly skewed. The repercussions could be great.

  2. Mohammed El-Erian warns that ‘central bank policy will be undermined by collateral damage and unintended consequences.’ Might there be a trade in the fallout?

  3. For now the trade is growth, risk-on: specifically long equities, oil, etc. Not yet inflation: trades like long gold or short treasuries have floundered, signaling that the market is not concerned with inflation or any other ‘unintended consequences’ at this point.

  4. Reuters reports (3/20/13): The flagship hedge fund of Fortress Investment Group is betting on a further slide in the Japanese yen, predicting the new central bank governor in Tokyo will step-up the pace of monetary policy easing. The $3.2 billion fund has proved one of the most successful macro funds – funds which bet on big shifts in the global economy and which are among the best-known in the industry – returning almost 18 percent last year when many top names shied away from bold bets and struggled to make money.

  5. Its working: spurring a massive global shift into higher yielding EM markets…
    (Bloomberg) Borrowing costs in emerging markets have sank to record lows as Japan’s unprecedented monetary easing spurs demand for higher-yielding assets. The average yield on developing-nation local-currency debt tracked by JPMorgan Chase & Co. has fallen 16 basis points since April 3, the day before the Bank of Japan expanded its asset- purchase program, to an all-time low of 5.39 percent yesterday. Ten-year government yields dropped to levels not seen before in Mexico, the Czech Republic, Poland and South Africa this week, while comparable rates in South Korea and the Philippines touched all-time lows in the past month.

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