USD Reversal is the Focal Point for 2010     

• While the Hatoyama Administration's fiscal stimulus and the BOJ's more active use of its balance sheet will keep the speculators from ravaging the yen, JGBs and Japanese stock prices, the real foal point for the yen and Japanese equities will be the same as that for the US, i.e., the timing and duration of a USD reversal triggered by a "normalization" of Fed monetary policy.
• On the other hand, an unwinding of the USD carry trade could very well be quite disruptive in terms of an interim correction, taking with it a great deal of emerging market, junk bond, commodity and equity gains of 2009. History has shown that such unwindings have been disruptive, at least over the short-term.
• Technically, the proclivity of the Nikkei 225  is up, not down, despite quite a lot of gloom and doom regarding a possible double dip in Japan's economy. Further, while foreign investor sentiment regarding Japanese equities is about as bad as it gets, investors need to remember how much Japanese exporters benefited from a combination of a weak yen and growth in world trade prior to the financial crisis.
• The dearth of import demand from the US and Europe this global recession is forcing Japanese companies to re-orient their product mixes to target the growing pool of emerging market consumers. This will require less bells and whistles on products to lower part counts to create products that often are half-price products sold in Japan.
• While this shift will affect profit margins, the shift to Asia so far is proving very profitable. Sales to the Asian region for Japanese firms for the first half of FY09 surpassed those to the US for the first time, while Asian operations for major firms are currently accounting for 80% of operating profits, given depressed profit levels in Europe, Japan and the US.
• The surprises in this secular shift to emerging and the Asian markets is that Japanese companies heretofore almost totally focused on domestic demand are also being forced to globalize their operations in the search for revenue and earnings growth. We believe this will eventually produce a few "domestic" consumer product companies that are truly global, i.e., like Nestle and Procter & Gamble, and result in revaluations.

< Go Back to List