Counterparties: Yen and the art of business cycle maintenance

By Peter Rudegeair
April 9, 2013

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It’s been five days since the Bank of Japan announced an “unprecedented degree of monetary easing” and the early verdict is positive: the Yen has fallen to a three-year low and Japan’s Nikkei stock index has hit a near five-year high. This monetary expansion, along with a huge fiscal stimulus, has made Japan the “most interesting story in global economics right now,” according to Neil Irwin.

The BOJ’s new policy aims squarely at hitting a 2% inflation target “at the earliest possible time”, and aims to double Japan’s monetary base. A bit of context, from UBS analyst Syed Mansoor Mohi-uddin: the BOJ’s asset purchasing program will be nearly large as the Federal Reserve’s, in an economy less than half the size of America’s.

Holders of Japanese equities are clear beneficiaries of this policy. Major exporters also stand to gain: Toyota could make $1,500 more per car thanks to improved profits on exports, according to Morgan Stanley estimates. Other winners from the BOJ’s easing are bit less obvious: European sovereigns such as France, Belgium, and the Netherlands are enjoying record low borrowing costs as Japanese investors shift from yen- to euro-denominated assets.

Among the most vocal critics of Japan’s newfound monetary aggressiveness are its East Asian neighbors. Chinese economists have labelled the new measures “monetary blackmail” and a stimulus that “could spell doom for other nations in the region.” Last month, South Korea’s finance minister called the yen a “flashing a red light” for his country’s exports. Despite their fears, Citibank’s Steven Englander says that the Bank of Japan’s moves, endorsed by the Fed and the IMF, are “very G7 compliant,” providing the central bank with political cover. Moreover, says Menzie Chinn, a boost in Japan’s economic output will also have positive spillovers on Chinese and Korean economic growth. That should mitigate the impact of lost export competitiveness.

George Soros provides the contrarian view. The BOJ’s policy could prove to be “actually quite dangerous” by being too effective at creating inflation, he says: “If what they are doing gets something started, they may not be able to stop it.” In that case, the benign fall in the yen “may become like an avalanche.” – Peter Rudegeair

On to today’s links:

Alpha
Memo to employers: Stop wasting your employees’ money on mutual fund fees – James Kwak

Legalese
AIG: Please don’t let Hank Greenberg sue the government on our behalf – DealBook

Unintended Consequences
Somehow, wood (yes, wood) has become Europe’s most important renewable energy source – Economist

RIP
A terrific — and tough — remembrance of Margaret Thatcher – John Cassidy

Investigations
Rogue accountant: KPMG fires senior partner for allegedly leaking insider info – NYT
Herbalife’s official statement on KPMG – Business Wire

Defenestrations
“I am Ron Johnson, destroyer of worlds” – JC Penney’s epic turnaround fail – Josh Brown
How Ron Johnson got caught in a typical turnaround trap – James Surowiecki

JP Morgan
If JP Morgan names a separate chairman, Jamie Dimon won’t stick around to see how it works out – Bloomberg
Jamie Dimon buys the perfect office for book writing, or dentistry – Bloomberg

EU Mess
“Germany is imposing the wrong policies on the Eurozone. Austerity doesn’t work” – George Soros

Growth Industries
America’s most profitable export is cash – Bruce Bartlett

Ouch
British banks are more leveraged than previously believed – FT

Cartography
Rio’s favelas have been erased, at least from Google Maps – Telegraph

Corporate Welfare
9 in 10 large Chinese private companies receive some form of state subsidy – Quartz

Interesting
Average new-car prices are rising while average monthly car payments are falling – WSJ

Financial Innovations
In terms of bank giveaways, beer and dog fairs are the new toasters – Market Watch

Charts
Yes, people are hoarding Bitcoins – Zach Seward

Slackers
Your least engaged employees are probably your best performers – HBR

Popular Myths
Our infrastructure isn’t crumbling — it’s mostly average – Bloomberg

And, of course, there are many more links at Counterparties.

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