The Japanese yen has been on a downward trend since mid-November 2012, losing ground against all major world currencies. Since then, it is down 22 per cent against the euro and 18 per cent versus the US dollar.
Japan has been in a deflationary cycle for the best part of two decades
One of the main drivers behind this fall is Japanese Prime Minister Shinzo Abe. Abe, brought to power as a result of Japan’s December 2012 general elections, threatened to change the laws under which the Bank of Japan operates should the bank not hit its two per cent inflation target.
Japan has been in a deflationary cycle for the best part of two decades. In its effort to restart this ailing economy, in September 2012 the BoJ embarked on its eighth round of quantitative easing to buy ¥10 trillion (now €81 million) of bonds, bringing the total accumulated in all rounds to ¥80 trillion (€649 million). More recently, the BoJ stated that from 2014 (when the current ¥101 trillion programme ends), it will “pursue aggressive monetary easing…”
Monetary easing has two main effects: lowering the country’s interest rates and reducing the value of the currency. Lower interest rates would generally stimulate domestic consumption – cheaper domestic bank lending would entice consumers to borrow funds and spend more. A cheaper yen will make Japanese cars and electronic products more competitive in overseas markets.
These actions have led equity traders to bid Japanese stocks up in the belief that corporate financials will flourish with the cheaper yen.
Have a look at the stock index data chart. At the time of writing over the weekend, year to date Topix (Tokyo index) is up 12.1 per cent, outstripping the impressive performances returned by most equity indices so far this year. UK equities were up 7.4 per cent to date, the S&P 500 up 6.3 per cent and DAX was up a ‘mere’ 0.65 per cent. Even the Swiss SMI was up 10.7 per cent aided by a weaker franc versus euro and the dollar.
However, just as impressive were the various currency movements so far in 2013. Versus euro, sterling is down 6.4 per cent, the Swiss franc down 1.6 per cent, yen is down 7.8 per cent, and the US dollar is flat.
Substantial currency movements can impact total returns when the local currency is not your home currency – this is captured in the second chart, where I attempt to bring indices’ euro-equivalent performance. Scaling and colour coding are constant in the two charts.
Unless hedged against currency movements, euro-referenced investors would have seen the following results: Japanese equity portfolio performance – based on the Topix – reduced from 12.1 per cent down to 3.9 per cent; UK equities down from 7.4 per cent to just one per cent; Swiss equities (SMI) performance eroded from 12.1 per cent to nine per cent (not charted); and US equities unchanged at positive 6.3 per cent.
One would suspect that we have not seen the end of similar global Central Bank actions and for the eurozone to turn to this same tool. With this in mind, in 2013 investors will need to manage their currency exposures more actively if they are to expect their portfolios to better reflect the performance of their non-euro equities.
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Curmi & Partners Ltd is a member of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the objective and independent opinion of the author. The value of investments may fall as well as rise and past performance is no guarantee of future performance.
Vincent Micallef is an executive director at Curmi and Partners Ltd.