Japan Rings In The End Of Globalization

After confirmation by the Diet, Mr. Kuroda will become the head of the Japanese Central Bank. Prime Minister Abe’s choice is an unmistaken signal that Japan is serious about reflating its economy. Both men agree on the need for Japan to take drastic monetary measures to get out of two-and-a-half decades of stagnation. The Bank of Japan will print money. The yen will weaken further, much further. Asset prices will be inflated.

To make sure his message is not diluted, Abe appointed Iwata to the job of Deputy Governor of the Bank of Japan. The latter did not wait long to make his intentions clear. He told Japanese Diet Members that the Bank should have the ability to buy assets even beyond treasuries. He also wants to buy corporate bonds and equities.

In a rather Japanese way, after decades of deliberation, Japan is going all in. Kuroda is promising to be Bernanke on steroids (yes, it is possible). He will print money, devalue the yen – already down 15% since Abe’s election* – and push all asset prices up. Iwata even hinted at negative nominal interest rates.

Japanese voters approve. Prime Minister’s Abe popularity is up in the 70’s**.

This is good news for Japanese blue chips. For years they had to compete with their hands tied behind their back. Because of the overvalued yen, Korean, Taiwanese or Chinese companies had a field day. For electronic products, Samsung has now replaced Sony as the coveted brand. Hyundai cars compete in the global automotive market with Toyota, Honda and Nissan. Lenovo is the world’s largest PC maker while Toshiba laptops have virtually disappeared. For years, Japanese companies were on the defensive. Some resisted well, others not so well.

Like their German counterparts, Japanese companies have been stellar exporters despite a strong currency. One could even argue that they did so thanks to a strong currency. As in “deutsche mark Germany,” the Japanese have responded to an overvalued currency by increasing the quality and the value added element of their products. A strong currency has continuously pushed them further up the quality curve. This logic, though, had reached its limit.

Well run blue-chip exporters like Toyota (TM), Fanuc (FANUY.PK) or Komatsu (KMTUY.PK) have spent decades adjusting to an uncompetitive currency. Through cost management and product differentiation, they remained competitive and profitable, often dominant. Just imagine what a devaluation of the yen is doing to their bottom line.

Other companies like Sony (SNE) or Panasonic (PC) have not fared as well. Currency devaluation may not save them. But Mr Iwata’s declared intention to buy securities will surely have the same result as Bernanke’s wealth effect. It will lift all boats. If you missed Bernanke’s latest bubble, join the party in Japan. It is just beginning. The Japanese are notorious for copying and then surpassing the West. Go long Japanese exporting blue-chips and hedge the currency.

There is unfortunately one caveat to this rosy scenario. South Korea, Taiwan or China are not going to stand still.

It is every man for himself now. The US started a stealth currency war under the disguise of quantitative easing. Japan makes it official. Decades of globalization are coming to an end.

$1 was worth 84.18 yen on December 16, 2012. On March 11, 2013 the rate was 96.04 yen to the dollar.
** Yomiuri poll Feb 8 – 10 has him just under 70%.

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