Monday, May 13, 2013
The Upshot
All the market insight and data you need to jumpstart your week
Falling Yen Reveals Rise of Financial Repression
Kristina Hooper, CFP®, CAIA, CIMA®, is US
head of investment and client strategies for
Allianz Global Investors. She has a B.A. from
Wellesley College, a J.D. from Pace Law and
an M.B.A. in finance from NYU, where she
was a teaching fellow in macroeconomics.
Will Japan’s gamble on devaluing the yen pay off or spark global
currency competition? While fears of currency wars are likely
overblown, the drop in the yen is yet another sign that financial
repression has taken hold.
Japan’s bold economic stimulus agenda has turned some heads, prompting
some central banks to intervene in an effort to counter currency appreciation. Cutting interest rates and devaluing currencies are further signs that
financial repression as a policy tool is spreading.
A long time from now, when financial historians write about this period
of unconventional monetary policy, they may point to May 9, 2013 as an
important date. That’s the day that the US dollar rose above 100 yen for the
first time since April 2009. It’s a day that has been anticipated since November 2012, when the market began discounting a new prime minister, Shinzo
Abe, and a dramatic shift in monetary policy. And it’s a day that’s been a long
time coming: Japan’s response to extreme monetary measures taken by the
Federal Reserve and other developed nations to recover from recession.
Index returns for the week ended May 10, 2013
Broad Market Returns
Total Return Total Return Total Return Total Return
Wk (%)
MTD (%)
QTD (%)
YTD (%)
DJ Industrial Average
1.11
2.04
4.01
16.43
S&P 500 TR
1.29
2.39
4.36
15.43
Barclays US Agg Bond
-0.40
-0.67
0.34
0.22
DJ UBS Commodity
-0.88
-1.26
-4.02
-5.10
0.77
0.63
6.47
16.17
1.79
3.35
5.34
14.32
FTSE NAREIT All REITs
NASDAQ Composite
Equity Returns
Total Return Total Return Total Return Total Return
Wk (%)
MTD (%)
QTD (%)
YTD (%)
Russell 1000
1.38
2.37
Russell Mid Cap
1.96
2.84
4.16
17.65
Russell 2000
2.19
2.96
2.58
15.29
MSCI EM
0.87
1.20
1.96
0.31
MSCI EAFE
0.69
0.52
5.76
11.19
MSCI Europe
0.39
1.41
5.81
8.67
MSCI Pacific
1.24
-0.99
5.82
16.13
-0.24
-1.65
2.35
9.53
2.21
-0.57
8.15
20.73
3.29
3.08
4.25
-0.48
MSCI Pacific Ex-Japan
MSCI Japan
MSCI China
Bond Market Returns
Barclays US Agg Bond
4.22
15.65
Total Return Total Return Total Return Total Return
Wk (%)
MTD (%)
QTD (%)
YTD (%)
-0.40
-0.67
0.34
0.22
BofAML US HY Master II
0.26
0.85
2.77
5.70
BofAML All Convertible All Qualities
1.43
2.58
4.29
12.21
Turning on the Tap
JPM GBI Global Ex US
-2.63
-3.37
-2.47
-6.55
To understand the significance of last Thursday, let’s go back in time to the
global financial crisis. Many developed countries embarked on financial
repression through quantitative easing during that period in an effort to
stimulate their economies. One notable exception was Japan. While Japan
began quantitative easing well before other developed nations, it was a
more moderate approach. That’s why the yen began rising in value
relative to the dollar four years ago.
JPM EMBI Global
-0.59
-0.17
2.66
0.30
Since the Bank of Japan announced its aggressive monetary policy stance on
April 4, embracing financial repression and dramatically expanding its level
of quantitative easing, the yen has continued the fall it began in November.
As a result, the US dollar has been flirting with the 100-yen mark. However,
the dollar did not rise above 100 yen until Thursday, presumably helped
by stronger-than-expected US jobs data. The drop in the yen is the result
us.allianzgi.com
Barclays Long Term US Treasury
-1.98
-3.12
0.75
-1.65
Barclays US Treasury 1-3 Yr
-0.03
-0.06
0.04
0.17
Equity Style Returns
Total Return Total Return Total Return Total Return
Wk (%)
MTD (%)
QTD (%)
YTD (%)
Russell 1000 Value
1.38
2.09
3.63
16.39
Russell 1000 Growth
1.38
2.67
4.85
14.86
Russell Mid Cap Value
1.65
2.41
3.56
18.28
Russell Mid Cap Growth
2.32
3.34
4.86
16.92
Russell 2000 Value
2.01
2.71
2.61
14.54
Russell 2000 Growth
2.39
3.23
2.55
16.10
Russell Micro Cap Value
1.92
2.41
2.04
13.40
Russell Micro Cap Growth
1.78
1.93
2.39
17.70
The Upshot | Monday, May 13, 2013
of Japan’s long-awaited policy response to the QE policies of the Fed, the
European Central Bank and the Bank of England. For Japan’s long-suffering
economy, embracing financial repression means a devaluation of its currency and the potential for greater exports. A more favorable exchange
rate is likely to get things moving in the right direction after several years
of currency headwinds.
“For Japan’s long-suffering economy, embracing
financial repression means a devaluation of its
currency and the potential for greater exports.”
When you think about what determines exchange rates, it starts with a discussion of supply and demand. And demand is dictated by several factors,
most notably a country’s interest rate and its inflation expectations. The QE
policies intended to stimulate economies also can raise inflation expectations. Higher inflation expectations not only encourages savers to spend
more—because their money will be worth less tomorrow than it is today—
but also it brings about a faster adjustment of real exchange rates relative
to emerging markets than one might expect. Why? Because
inflation expectations are so low for many developed nations.
Choking Off Yield
View the online version—including the chart
of the week:
The yen crossed a critical exchange-rate
threshold on May 9, capping a six-month
decline against the dollar.
Market Movers
This week’s economic calendar
Monday
Retail Sales (month/month change):
Previous: -0.4%/Consensus: -0.3%
Business Inventories (month/month change):
Previous: 0.1%/Consensus: 0.3%
Tuesday
Import Prices (month/month change):
Previous: -0.5% /Consensus: -0.5%
With higher interest rates and higher inflation expectations, it’s no surprise
that currencies of many emerging-market nations are more highly valued.
For example, many Asian nations have struggled with an influx of foreign
capital flows, as investors chase the higher interest rates they offer. This is
a direct effect of financial repression, which has caused many developed
countries to lower interest rates to artificially low levels, choking off many
sources of yield and forcing investors to countries with higher relative
interest rates (largely developing countries.) In fact, a World Bank analysis
of flows to emerging markets globally (cited in the Wall Street Journal)
shows a 42% increase to $64 billion year-to-date ending April 30.
Export Prices (month/month change):
Previous: -0.4% /Consensus: -0.1%
Of course, many emerging-market countries would like their currencies to
devalue in relative terms so that their goods are more attractively priced
to foreign consumers. They are looking longingly at Japan, which appears
poised to reap the rewards of its currency devaluation. A sharply weaker
yen will likely enable at least some of the country’s leading automotive and
electronics companies to report stronger earnings and raise their future
outlooks. Conversely, countries like South Korea are suffering. The South
Korean won has risen 24% against the yen in the past six months, hampering
its competitiveness relative to Japan in the export of cars and electronics.
Thursday
It’s no surprise, then, that we’ve seen so many interest-rate cuts by
emerging-market economies in the past several weeks. India, Poland, Sri
Lanka, Vietnam and South Korea have all cut their interest rates in an attempt to counter currency appreciation. Even developed nations that vowed
not to intervene in their currency’s valuation are having second thoughts.
For example, Sweden, which exports a substantial portion of its economic
output, said the krona’s appreciation may warrant central bank intervention.
Financial repression has a way of pulling more and more countries into its
tight embrace.
Wednesday
Producer Price Index (month/month change):
Previous: -0.6%/Consensus: -0.7%
Empire State Manufacturing Survey: Previous: 3.05/Consensus: 3.75
Industrial Production (month/month change):
Previous: 0.4%/ Consensus: -0.2%
Housing Market Index: Previous: 42/Consensus: 44
Initial Jobless Claims: Previous: 323,000/Consensus: 330,000
Consumer Price Index (month/month change):
Previous: -0.2%/Consensus: -0.3%
Housing Starts: Previous: 1,036,000/Consensus: 969,000
Philadelphia Fed Survey: Previous: 1.3/Consensus: 2.2
Friday
Consumer Sentiment: Previous: 76.4/Consensus: 78.0
The Upshot | Monday, May 13, 2013
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The Upshot | Monday, May 13, 2013
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