For Japan, the hits keep on coming. Just last week, China
knocked the country off its perch as the world's second-largest
, dealing a sharp blow to national pride. But this week's news is
even more sobering. The Japanese Yen is surging to a 15-year high
of around 85 yen to the U.S. Dollar. Why the sharp recent move?
Because the U.S. Federal Reserve has recently hinted that it may
start to resume "quantitative easing," whereby it prints money to
inject funds into the financial system and spur banks to lend at
greater volumes. As that move potentially pushes up inflationary
pressures down the road, the dollar weakens.
For a country like Japan that perennially struggles to boost
domestic consumption and instead relies on its major exporters,
this could lead to real pain. First, its exports are quickly
becoming less competitive. Second, any profits that are associated
with exports will shrink at the rate that the
is strengthening. This could not come at a worse time -- Japan is
wrestling with a rapidly aging workforce and surging government
debt (which is far higher than our debt levels, as a percent of
The demographic data are sobering. According to the U.N.'s
Population Division, Japanese households are having an average of
1.4 children (well below the 2.1 replacement rate), and when
coupled with restrictive immigration policies, it has led to a
steadily rising average age. Roughly 20% of Japan's population is
65 or older. By 2050, that figure should rise to 37%, according to
the U.N. The United States should see that figure rise from a
current 12.3% to 21.0% over that time frame.
The Reserve Bank of Australia analyzed the impact of aging
demographics on economies, and concluded that "as fertility
continues to decline faster in the home economy, the home currency
begins a sustained
, first in nominal then with a lag in real terms. In the medium and
long runs, the nominal and the real exchange value of the home
currency settle at appreciated levels significantly higher relative
to baseline." This means the yen could continue to hit new highs
against the dollar for years to come.
As far as weakening the yen goes, Japan's options are few, which
partially explains why new Prime Ministers have had increasingly
short tenures in recent years.
What a strong yen means for Japanese ADRs
As a result, the risks to Japan-focused investments are rising
(though the benefits to the U.S. are less clear cut). Take
Honda Motor (
for example. Honda has done a great job of opening factories in
many places outside of Japan, but the company still operates many
factories at home. The rising yen means its labor costs are out of
whack, right at a time when China is keeping a lid on its currency
and countries like Vietnam, Thailand, Malaysia and the Philippines
are gearing up to become export powerhouses. Shares of Honda have
moved back up above $30 lately, but any sobering comments from
management about the rising currency are likely to push shares back
Other vulnerable Japanese
Toyota Motor (
As its manufacturing competitiveness continues to weaken, Japan
could look to emulate the Dutch or Swiss model, which focuses more
on financial and trade services and ownership of foreign assets.
But that may be hard to pull off as the company's finances weaken.
So what does this mean for the U.S. economy? As a clear negative,
we should no longer count on Japan to be a steady buyer of our
government debt. It may even look to shed some U.S.
holdings, and that could push our interest rates up and/or further
weaken the dollar.
But these changes could also serve to strengthen the competitive
position of the U.S. worker. Relatively young demographics
generally portend higher rates of consumer spending. And for goods
and services that are best produced near the consumer, more jobs
will be created. That means even more Toyota and Honda plants in
the U.S., and fewer in Japan.
Action to Take -->
There are few direct ways to go long on the strengthening yen. As
some speculate that the yen is only going to get weaker if the U.S.
Federal reserve follows through with plans to re-initiate a
quantitative easing plan when it meets August 11th, investors might
want to buy shares of the
CurencyShares Japan Yen Trust (NYSE: FXJ)
exchange-traded fund (
Investors can also seek out U.S. companies that have a strong
retail presence in Japan and would repatriate more profits in terms
of foreign exchange gains. Names like
come to mind, but it's unclear if the Japanese consumer will spend
in such an increasingly dire environment.
Investors can play this news on the short side by seeking out funds
that focus on Japan. For example, the
iShares MSCI Japan Index (NYSE; EWJ)
would get hit if Japanese exporters take it on the chin. Or look to
short shares of those large Japanese exporters noted above.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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