A 'Yen' for a Better Economy
06/10/2013 7:45 am EST
Japan is making bold economic moves, and that is providing some opportunities in the volatile market, says Alfonso Esparza of OANDA.
Nancy Zambell: My guest today is Alfonso Esparza. He's the senior currency strategist with OANDA. Welcome, Alfonso, and thank you so much for joining me.
Alfonso Esparza: Hi Nancy. Thanks for having me here.
Nancy Zambell: Since the last time we spoke a couple of months ago, Japan has changed their monetary policy, and that's having some wide-ranging effects on cyclical markets worldwide. What is your take on what the Japanese government is doing?
Alfonso Esparza: It's actually one of the boldest moves right now in the currency world. It all started back when current Prime Minister Abe was the running candidate. He basically pointed to a 2% inflation target—which for a country like Japan, which is in a deflationary state, is very bold.
What's more, he said that they were going to meet that target in two years. That was, basically, the only requirement for the new Head of the Bank of Japan.
Bank of Japan's Kuroda signed up for that target, and his first big announcement was to say that they were going to be doubling the bond purchases to double the monetary base in Japan. So a lot of cash is going into the system just to try to get the inflation target in place.
Nancy Zambell: The yen is at pretty low levels these days, so what kind of trades are people making? Are they buying or selling yen?
Alfonso Esparza: The main strategy of the market is sort of selling yen. The yen has depreciated around 20% versus the dollar, and that's great for Japan as an economy. Because they're exporters, they need weak currency, so right now they're doing basically everything they can to maintain those levels and drive them even further down.
On the flipside—because the stock market is full of exporting companies—they are actually gaining, so the Japanese stock market is up around 70% this year. It's been a double effect: The weak currency helps the economy, but also helps because it helps the exporting companies, which helps the stock index.
Nancy Zambell: The stock index has really done phenomenally well, considering for about the past 20 years the market did nothing.
Alfonso Esparza: Yes, and that's the power of Shinzo Abe. He now has his whole brand of economics—Abenomics—and what he's done is very boldly pushed the Japanese economy—sort of jolted it out of stagnation.
The question mark is, would it be a short-term recovery, or does it really have enough push to make it a sustained recovery?
Nancy Zambell: I guess you can say the same thing in the US with Bernanke buying bonds every month. He's sort of confused our markets, saying that they were going to continue the bond purchases and then backing down—actually saying they were going to start tapering off.
Many people are saying that if that does happen and the Fed tapers off, we're getting a look this week at what can happen to the market with the pullback. So I guess the same thing could happen in Japan as is happening here.
Alfonso Esparza: Definitely. The US is sort of the central bank; the Fed is leading the charge. It's gotten accolades from the business world. I remember Warren Buffett singled out Bernanke as the savior of the economy—that all the progress that had been done in the past couple years—it's due to him.
There's a lot of faith from the business community in Bernanke. We see the contrast from the Bank of Japan, with very bold statements now; the ECB, with their bold statements, last year, that they are going to defend the euro.
And Bernanke is still very moderate, trying to gage the market by dropping those little hints, saying the recovery is here, but we're waiting to see if it's a sustained recovery. So, yes, we want to slow down QE, but we'll do it once employment is at a level that we feel is safe. It's sort of hedging their bets.
Nancy Zambell: Yes, it looks like he's sending out feelers to see what would happen if we do stop the program, a little bit at a time.
What is your take on emerging markets now? China had some disturbing news with their purchasing managers index when it fell below 50. A lot of advisors I've been speaking with are very gung-ho on China these days.
Alfonso Esparza: The economy is definitely slowing down, and that has a lot of implications for the world economy, as they're such a large partner for countries such as the US and Canada.
The developed world depends on China. And the emerging markets depend on China for their consumption. All the commodities that are exported into China are starting to slow down. That has touched economies like Australia, Brazil, Malaysia, and Thailand.
But the flipside to that is that Christine Lagarde, the head of the IMF, came out with a very interesting theory about the three speeds of recovery, and she's singling out the emerging markets as the fastest in terms of recovery.
They have all the infrastructure already in place. They survived crises ten or 15 years ago, and those crises actually made them better, because now their banking system is stronger, and their exports and tariffs are in a place where they're conducive to growth. That's why they're recovering so fast in the current environment.
The second speed, which is more moderate, is the US, and the IMF is seeing recovery in the States. It's moderate, based on retail sales growth, the employment numbers, and housing, which all point to—if not a strong recovery, at least it's bouncing in the right direction.
And in the third speed—almost stagnant, not the best place to be—is Japan and Europe. We know the problems in Europe. It's a debt crisis, it's a housing crisis, an employment crisis, and it's also too many governments really trying to pull for their own and not reaching consensus as quickly as the market would like. And Japan—through bold statements and bold economic policies—is trying to join the US on the slow recovery track. At least it's on the right path.
Nancy Zambell: Where do you see opportunities in currencies right now?
Alfonso Esparza: The yen has proven to be volatile. It has moved more than 20% this year alone. The trade has become very crowded. It was very basically a no-brainer, and now everybody was targeting that. So there's opportunities on both sides to be a contrarian, and also to follow the trend.