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Along with the regular holiday cheer that comes each December, investors and traders also receive previews looking at the year ahead from just about every major brokerage firm. I’ve spent the last few weeks reading many of these previews. And as usual, there isn’t much out-of-the-box thinking in them.
But as I consider what to expect in 2013, there is one area of the market that offers a strong contrarian opportunity based on the only constant in this market: Meddling politicians and central bankers.
This Sunday Shinzo Abe became the new PM of Japan. And over the last few weeks leading up to the election he has openly lobbied for the Bank of Japan (BOJ) to increase its inflation target to 2 percent or 3 percent from its current 1 percent.
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| Shinzo Abe, Japan’s new PM, has vowed to fight the strong yen and reduce deflation. |
That may sound tame. But what he is demanding is a shift from deflationary central bank policies, to inflationary central bank policies. He wants the BOJ to print lots of yen as a way to boost exports and the economy, along with inflation.
It appears as though the political winds in Japan have changed. And after 30 years of economic stagnation and rewarding savings over investment (which has only perpetuated the deflationary cycle) Japan is having a seminal moment. Abe’s Liberal Democratic Party won in a landslide Sunday. And now it is governing with a clear mandate to get the economy moving again at any cost.
That means his proposed changes will likely sail through the Japanese Parliament. And for the first time in a generation the Japanese will have more incentives to invest their capital rather than just plow it into Japanese government bonds.
What’s in Store for the Yen
This has some wide-reaching implications for the global economy. But one of the assets that will be hurt most by this new inflationary monetary policy is the Japanese yen.
By enacting government stimulus projects and printing literally trillions more yen, Japanese bonds and the yen should decline. Consequently, Japanese companies that export goods around the world should benefit since the price of those goods on the world market will be cheaper … thanks to the falling yen.
An old saying on Wall Street is “Don’t fight the Fed.” A corollary to that is “Don’t fight the Bank of Japan.” And if Japan’s new government and its central bank are determined to spur inflation to stimulate economic growth — they will most likely succeed, at the expense of the yen and holders of Japanese bonds.
The key here is that there is an easy way for you to potentially profit from the trend. The ProShares Ultra Short Yen (YCS) is an ETF designed to rise 2 percent for every 1 percent drop in the yen versus the dollar. If these inflationary policies are enacted in Japan, and every sign is they will be, the yen should decline and the YCS should rise.
In an investment landscape as uncertain as the one in which we live, it seems the only constant in the market is central banks trying to spur growth by printing money. In the case of Japan, that strategy is about to go into overdrive. And from investment perspective it offers you a bit of clarity amidst a world still shrouded in uncertainty.
Have a wonderful holiday season,
Tom
