Where now on the yen, asks ING IM’s Maarten-Jan Bakkum
Maarten-Jan Bakkum, equity strategist at ING IM, identifies Japan’s new monetary policy as potentially the most important development in financial markets in recent months.
The most important development in the financial markets of the past months is without doubt the new monetary policy of Japan which caused a sharp depreciation of the yen. This is good news for the Japanese growth prospects. The new liquidity injection should benefit domestic demand while the weakening yen will give a new impulse to the export sector. But what does this mean for the rest of the world and in particular for emerging markets, that are, similar to Japan, highly dependent on their export growth?
The new path in Tokyo could be beneficial for the world as a whole. After the Fed, BoE and to a lesser extent the ECB, yet another major central bank that is printing additional money. If this leads to higher economic growth in Japan, other countries must be able to benefit. More importantly perhaps is that the example of Japan could encourage the ECB and other more conservative central banks to a more decisive policy. All in all the new policy course of Japan increased the probability that worldwide liquidity growth will remain strong.
This should be positive for the emerging markets that are most dependent on foreign capital to finance their current account deficits. It could also give a new boost to bond markets in the emerging world, despite the fact that emerging market debt is no longer relatively cheap and the risks for this investment category have risen due to increased macro-economic imbalances in a number of important countries.
The developments in Japan and in particular of the weakening of the yen have their biggest impact in the rest of Asia. The 21% depreciation of the yen compared to the dollar in just four months is off course immense. In the same period only the Korean won and Taiwanese dollar have decreased in value as well, but with just respectively 5% and 3%. The loss of competiveness of the export countries in east-Asia poses a problem because the economic growth is already under pressure and the growth in world trade is at a much lower level and should remain low compared with a few years ago. Therefore, we can expect most countries in Asia will do whatever they can to get their currency back in line with the yen. Consequently currency appreciation will no longer be an investment theme in the region. Inflation worries can also resurface if monetary policy will become even looser than it already is. As a result international capital will be even more critical about equity markets in emerging Asian than it already was due to the increasing doubts over the Chinese growth prospects.