What Is the Bank of Japan Up To?

02/23/2012 8:45 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Senior Markets Editor Jim Jubak discusses the recent interesting developments in Japan, and what this may mean to the outlook for investing in Japan.

How long as it been since you have thought about Japan as an investment? Or thought about Japan's economy? Or thought about Japan at all within this context? I bet you it has been a long time.

Well, we have had a couple of interesting things happen in Japan. One is that the Bank of Japan has decided that hey, even Japan needs some growth, and they put about $320 billion or so worth of yen into buying assets. It is their own version of the Fed's quantitative easing.

The reason for that is because in four out of the last five quarters, Japan has had negative growth. They had one huge surge, largely recovery from the earthquake and tsunami, but the economy is really not going anywhere. Japan doesn't have any inflation, and had negative prices-I guess that means price decreases-in the most recent quarter, so the Bank of Japan decided they would like some inflation, and we are actually going to put some money on the line and do this.

Two things that are important about this. One, just inside of Japan, Japanese exports may not be doing very well, because they really depend on cheap yen or expensive yen.

So if you are a company like Canon, the growth of the Japanese domestic economy is not nearly as important as currency swings. If you are going to invest in the Japanese export economy, what you really are doing is investing in the yen-dollar exchange rate.

If you look at the Japanese domestic economy and companies that sell into the Japanese domestic economy, the action by the Bank of Japan is a big deal, because these are the companies that rise or fall not with exports so much as they do with whether it is a Japanese consumer, or a Japanese business, or selling.

So if you are looking at a GREE or you are looking at, say, a Sanrio, which sells still most of its product in Japan-Sanrio makes the Hello Kitty stuff-you are looking at companies that are more pegged to that.

Really, the thing that makes this kind of interesting is that the Japanese economy is so far out of sync with most of the world's economies that if you are looking for an uncorrelated asset-if you are looking for a stock market that doesn't move in correlation with the US market or the Chinese market-Japan is a very interesting thing to look at.

You have had Japanese stocks of a certain sort rallying while the rest of the world's markets are not going anywhere, for example, during some parts of 2011. So this is something to look at.

The last part of the Bank of Japan's action is that it really puts them in line with.maybe it is the last of the major central banks to decide they are going to stimulate their economy by adding to the money supply.

But I think now we can officially say this is a global phenomenon, we have got the Bank of Brazil, we have got the People's Bank of China, we have got the Bank of Japan, we have got the Fed, we have got the ECB-all of them pumping lots and lots; billions, if not trillions of dollar equivalents into their economies.

This big wash of liquidity is out there, and that is really the dominant thing in both world economies right now and in world financial markets.

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