If the readership of this site reflects most of America, about 1/3rd of the readers will be terrified by this headline while another 1/3rd would cackle in glee. But it's not really about Paul Krugman, it's about Shinzo Abe of the Liberal Democracti Party of Japan. In his second go around at the position the man is putting every Keynesian idea to the test, and at first glance in a more forceful manner than previous regimes. In fact in many ways he is running a very American solution (since 2009) – have the central bank go very aggressive and combine it with stimulus of various forms (in the U.S. this has run the gamut from extremely low taxes relative to social services, tax holidays, the 2009 mega stimulus, running Fannie, Freddie and the FHA as stimuli organizations, and a massive annual federal deficit of 8-11%). If you are unfamiliar with the background we wrote about it a few weeks ago in [Jan 14, 2013: The Double Down in Japan]
As I look around trying to see what is so fantastic about today to lead to such an upside move in risk assets, it seems to boil down to nothing but the continued demise in the yen. The currency began to turn down in anticipation of Abe's election in early winter and has only accelerated down this path since. While there are minor oversold bounces along the way it's been quite a free fall – I put a 3 year chart up to show how extreme it has been in a short period of time.
Of course currencies are all relative and for every "winner" (err loser…err winner) there is the opposite. And in this case with the ECB being the least egregious in actions it is the Euro.
The dollar is somewhere in between those other two. As a major exporter the idea here is Japan continues to be aggressive in fiscal and monetary policy, devaluing its currency to make its exports cheaper. Of course this will lead to derision from other nations and it has already begun from major export competitors Germany and South Korea. Bigger picture, this continues a cycle as one country after another tries to take the mantle of devalue-er in chief.
Word overnight is the Bank of Japan chief is headed out early and Abe will of course appoint a Janet Yellen type dove. Hence the yen dive and apparently all risk assets are fine to buy. I would like to point out on the 3 year chart above a low in May 2010 that should provide some near term support if and when the currency gets there. So the question is – what do risk assets do if there is a short term (i.e. 5-10 day bounce) in the yen as this is the fashionable trade of the moment?
Any securities mentioned on this page are not held by the author in his personal portfolio.